What changed in this filing

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Item 1. Financial Statements

2021-05-10 compared with 2020-11-09 · 129 added, 240 removed, 244 unchanged (60% of the section changed)

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(In thousands, except share and per share data)

September 30,

Current assets:

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Unsecured convertible senior notes, net

Deferred tax liability

Commitments and contingencies (Note 9)

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Preferred stock, par value $ 0.01 per share, 20,000,000 shares authorized;

none issued and outstanding at September 30, 2020 and December 31, 2019.

Common stock, par value $ 0.01 per share, 150,000,000 shares authorized at September 30, 2020 and December 31, 2019;

61,651,152 and 54,200,810 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.

none issued and outstanding at March 31, 2021 and December 31, 2020.

Common stock, par value $ 0.01 per share, 150,000,000 shares authorized at March 31, 2021 and December 31, 2020;

62,252,012 and 61,671,231 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively.

Additional paid-in capital

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Three Months Ended

Nine Months Ended

September 30,

Product sales , net

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Loss from operations

Loss on early extinguishment of debt

Interest expense

Other (expense) income

Loss before income taxes

Income tax benefit

Comprehensive loss

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(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities:

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Depreciation and amortization

Loss on early extinguishment of debt

Deferred income tax

Fair value settlement upon termination of cap call contract

Changes in operating assets and liabilities:

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Proceeds from the sale and maturities of investments

Net cash (used in) provided by investing activities

Net cash provided by investing activities

Financing activities:

Proceeds from issuance of convertible senior notes, net of issuance costs

Purchases of capped calls related to convertible senior notes

Payments for repurchases of convertible senior notes

Proceeds from termination of capped call contracts

Proceeds from issuance of common stock, net

Proceeds upon exercise of stock options

Principal payments on finance lease liabilities

Proceeds upon exercise of stock options and warrants

At the market offering costs

Payments on finance lease obligations

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Organization and Significant Accounting Policies

Note 1—Description of Business

Description of Business

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

Our first drug product, OMIDRIA, is marketed in the United States (U.S.) for use during cataract surgery or intraocular lens replacement.

Our first drug product, OMIDRIA ® (phenylephrine and ketorolac intraocular solution) 1%/0.3% , is marketed in the United States (“U.S.”) for use during cataract surgery or intraocular lens replacement.

In December 2020, the Centers for Medicare & Medicaid Services (“CMS”) confirmed that OMIDRIA qualifies for separate payment when used on Medicare Part B patients in ambulatory surgery centers (“ASCs”), effective retroactively as of October 1, 2020.

OMIDRIA’s pass through status, which had allowed for separate payment when used on Medicare Part B patients in the ASC or hospital setting, had expired on October 1, 2020.

Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) under priority review by the U.S.

Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”).

We also have multiple late-stage clinical development programs in our pipeline, which are focused on:

complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19.

Basis of Presentation

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generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.

The information as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019 includes all adjustments, which include normal recurring adjustments, necessary to present fairly our interim financial information.

The information as of March 31,2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020 includes all adjustments, which include normal recurring adjustments, necessary to present fairly our interim financial information.

The Condensed Consolidated Balance Sheet at December 31, 2020 has been derived from our audited financial statements but does not include all of the information and footnotes required by GAAP for audited annual financial information.

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Risks and Uncertainties

In its 2021 outpatient prospective payment system (OPPS) proposed rule, the Centers for Medicare and Medicaid Services (CMS), a part of the Department of Health and Human Services (HHS), confirmed the October 1, 2020 expiration of pass-through reimbursement for OMIDRIA and indicated an intention to package payment for OMIDRIA with payment for the associated surgical procedure in both the hospital outpatient department (HOPD) and ambulatory surgery center (ASC) settings.

We are continuing to pursue administrative and legislative avenues to secure separate payment for OMIDRIA;

however, we cannot provide assurance that these efforts will be successful.

The outbreak of the novel strain of coronavirus (SARS-CoV-2) that causes COVID-19 and the responses to the global pandemic by various governmental authorities, the medical community and others continue to have a significant impact on our business.

In March 2020, ASCs and hospitals using OMIDRIA postponed nearly all cataract surgery in response to recommendations from government and medical organizations.

As a result, we did not record any sales of OMIDRIA to our wholesalers from March 25 to May 19, 2020.

However, by the end of June 2020, the run rate of weekly OMIDRIA sales had recovered to levels approximating those seen prior to the pandemic.

Due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, it is not possible to estimate precisely its impact on our business, operations or financial results;

however, the impact has been and could continue to be material.

As of September 30, 2020, we had cash, cash equivalents and short-term investments of $ 153.5 million and an accounts receivable-based line of credit that allows us to borrow up to the lesser of $ 50.0 million or 85 % of our accounts receivable borrowing base, less certain reserves.

We have incurred losses from operations of $ 76.8 million for the nine months ended September 30, 2020, and cash used in operating activities was $ 81.7 million for the nine months ended

September 30, 2020.

We will continue to incur losses from operating activities until our revenues exceed operating costs and debt service obligations.

OMIDRIA pass-through reimbursement from CMS expired on October 1, 2020.

If continued separate payment is determined not to be reasonably achievable in the near term, we have developed a commercial strategy that can be quickly implemented to lower the per-vial sales price of OMIDRIA to achieve substantially larger sales volumes.

We believe that this approach would result in substantial revenues from OMIDRIA, in part because CMS Medicare Part B beneficiaries only represent approximately 45 % of cataract surgery procedures annually.

We anticipate narsoplimab for HSCT-TMA will receive FDA approval and will launch in early to mid-2021.

Currently we cannot fully predict the timing or the magnitude of narsoplimab revenues, but we believe they will be significant.

Execution of our sales and marketing strategies for the launch of narsoplimab for HSCT-TMA is underway.

These plans include various milestones at which we commit to incremental activities, providing for flexibility in the timing of costs incurred should the approval of narsoplimab be accelerated or delayed.

If warranted, we will adjust the timing and associated costs of our HSCT-TMA launch activities as we advance through the biologics license application (BLA) review and approval process.

We plan to continue to fund our operations for at least the next twelve months with our cash and investments on hand, from sales of OMIDRIA and, if FDA approval is granted, from sales of narsoplimab for HSCT-TMA.

There is also the possibility that we could generate revenue from sales of narsoplimab for the treatment of COVID-19.

In addition, we may utilize funds available under our accounts receivable-based line of credit, which allows us to borrow up to 85 % of our available accounts receivable borrowing base, less certain reserves, or $ 50.0 million, whichever is less.

Should it be necessary or determined to be strategically advantageous, we also could pursue debt financings, public and private offerings of our equity securities similar to those we have completed previously, or other strategic transactions, which may include licensing a portion of our existing technology.

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

The COVID-19 pandemic and the responses to it by various governmental authorities, the medical community and others have had a significant impact on our business.

It is not possible to estimate precisely the future impact of COVID-19 on our business, operations or financial results due to the unknown magnitude, duration and outcome of the pandemic.

We have filed with FDA our narsoplimab BLA for HSCT-TMA, which has been granted priority review with an FDA action date of July 17, 2021 under the Prescription Drug User Fee Act.

We anticipate, but cannot guarantee, that narsoplimab will receive FDA approval and will launch in the U.S.

If approved, we cannot fully predict the timing or the magnitude of narsoplimab revenues, but we believe they will be significant.

Our sales and marketing

strategies for the launch of narsoplimab for HSCT-TMA include various milestones at which we commit to incremental spending, providing for flexibility in the timing of costs incurred should the approval of narsoplimab be delayed.

We plan to continue to fund our operations for the next twelve months with our cash and investments from sales of OMIDRIA and, if FDA approval is granted, from sales of narsoplimab for HSCT-TMA.

In addition, we may utilize funds available under our line of credit, which allows us to borrow up to 85 % of our available accounts receivable borrowing base, less certain reserves, or $ 50.0 million, whichever is less.

We also entered into a sales agreement to sell shares of our common stock, from time to time, up to an aggregate offering amount of $ 150.0 million through an “at the market” equity offering program.

Should it be necessary or determined to be strategically advantageous, we could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology.

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Significant items subject to such estimates include revenue recognition, stock-based compensation expense and accruals for clinical trials, manufacturing of drug product and clinical drug supply and other contingencies.

Significant items subject to such estimates include revenue recognition, stock-based compensation expense and accruals for clinical trials as well as manufacturing of drug product.

We base our estimates on historical experience and on various other factors, including the impact of the COVID-19 pandemic, that we believe are reasonable under the circumstances;

however, actual results could differ from these estimates.

Note 2—Significant Accounting Policies

Revenue Recognition

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We reflect each of these accruals or allowances as either a reduction in the related accounts receivable or as an accrued liability depending on how the amount is expected to be settled.

Inventory is stated at the lower of cost or market determined on a specific identification basis in a manner that approximates the first-in, first-out (“FIFO”) method.

Costs include amounts related to third-party manufacturing, transportation and internal labor and overhead.

Capitalization of costs as inventory begins when regulatory approval of the product candidate is reasonably assured in the U.S.

or the European Union (“EU”).

We expense inventory costs related to product candidates as research and development expenses prior to receiving regulatory approval in the respective territory.

Inventory is reduced to net realizable value for excess and obsolete inventories based on forecasted demand.

Right of Use Assets and Related Lease Liabilities

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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.

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.

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We account for leases with initial terms of 12 months or less as operating expenses on a straight-line basis over the lease term.

Advance Payments

Advance payments for goods or services that will be used or rendered for future research and development activities are deferred and then recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments based on estimated fair values as of the date of grant.

The fair value of our stock options is calculated using the Black-Scholes option-pricing model, which requires judgmental assumptions around volatility, forfeiture rates and expected option term.

Compensation expense is recognized over the optionees’ requisite service periods, which is generally the vesting period, using the straight-line method.

Forfeiture expense is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates.

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.

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A valuation allowance is established when it is more likely than not that the deferred tax assets will not be realized.

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments based on estimated fair values as of the date of grant.

The fair value of our stock options is calculated using the Black-Scholes option-pricing model which requires judgmental assumptions including volatility, forfeiture rates and expected option life.

We use the straight-line method to allocate stock-based compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period.

Recently Adopted Pronouncements

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments—Credit Losses , (Topic 326) which changes how entities account for credit losses on most financial assets and certain other instruments and expands disclosures.

The standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted.

We adopted the standard on January 1, 2020 and the adoption did not have a material impact on our consolidated financial statements and disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.

Among other changes, ASU 2020-06 removes from U.S.

GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt.

Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument.

Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under Topic 815, Derivatives and Hedging , or (2) a

convertible debt instrument was issued at a substantial premium.

Among other potential impacts, this change is expected to reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the Company’s convertible senior notes.

Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share (EPS), which is consistent with the Company’s accounting treatment under the current standard.

ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020, and can be adopted on either a fully retrospective or modified retrospective basis.

The Company is evaluating the impact of this pronouncement on its consolidated financial statements.

In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Income Taxes (Topic 740), which is intended to simplify various aspects of the income tax accounting guidance, including elimination of the exception to the incremental approach of intra-period tax allocation when there is a loss from continuing operations and income or gain from other items (for example, other comprehensive income).

ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

Early adoption is permitted, including adoption in an interim period.

The Company is evaluating the impact of this pronouncement on its consolidated financial statements.

We have a history of losses and therefore have historically not made a provision for income taxes.

On January 1, 2021, we adopted Accounting Standard Update (“ ASU”) 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) on a modified retrospective basis.

ASU 2020-06 removes the separate liability and equity accounting for our convertible senior notes.

Consequently, we now account for our convertible senior notes wholly as debt.

(See “Note 3 – Net Loss Per Share” and “Note 7 – Unsecured Convertible Senior Notes” for further information)

On January 1, 2021, we adopted ASU 2019-12, Income Taxes (Topic 740), which is intended to simplify various aspects of the income tax accounting guidance, including elimination of the exception to the incremental approach of intra-period tax allocation when there is a loss from continuing operations and income or gain from other items (for example, other comprehensive income).

We adopted the standard on a prospective basis and the impact to our consolidated financial statements for the three months ended March 31,2021 was immaterial.

Note 3—Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period.

Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common share equivalents outstanding for the period, determined using the treasury-stock method.

Common share equivalents are excluded from the diluted net loss per share computation if their effect is anti-dilutive.

The basic and diluted net loss per share amounts for the three and nine months ended September 30, 2020 and 2019 were computed based on the shares of common stock outstanding during the respective periods.

Potentially dilutive securities excluded from the diluted loss per share calculation are as follows:

Our potentially dilutive securities include potential common shares related to our stock options, warrant and unsecured convertible senior notes.

Diluted earnings per share (“Diluted EPS”) considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.

Shares issuable under the unsecured convertible notes are calculated using the if-converted method and are excluded from the below table as their impact is anti-dilutive.

Diluted EPS excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period.

Potentially dilutive securities excluded from Diluted EPS are as follows:

Three Months Ended

Nine Months Ended

September 30,

Outstanding options to purchase common stock

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Accounts receivable, net consist of the following:

September 30,

(In thousands)

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Total accounts receivables, net

Trade receivables as of September 30, 2020 are shown net of $ 8.7 million of product return and chargeback allowances.

Trade receivables as of December 31, 2019 are shown net of $ 1.6 million of chargeback allowances.

Trade receivables net of product return and chargeback allowances were $ 1.5 million and $ 1.2 million as of March 31, 2021 and December 31, 2020, respectively.

Inventory consists of the following:

September 30,

(In thousands)

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Property and equipment, net consists of the following:

September 30,

(In thousands)

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Total property and equipment, net

Depreciation expense for the three months ended September 30, 2020 and 2019 was $ 0.4 million for both periods, respectively.

Depreciation expense for the nine months ended September 30, 2020 and 2019 was $ 1.2 million and $ 1.3 million, respectively.

For the three months ended March 31, 2021 and 2020, depreciation and amortization expenses were $ 0.4 million.

Accrued Expenses

Accrued expenses consist of the following:

September 30,

(In thousands)

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Contract research and development

Employee compensation

Consulting and professional fees

Interest payable

Employee compensation

Clinical trials

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Note 5—Fair-Value Measurements

As of September 30, 2020, and December 31, 2019, all investments were classified as short-term and available-for-sale on the accompanying Condensed Consolidated Balance Sheets.

As of March 31, 2021, and December 31, 2020, all investments were classified as short-term and available-for-sale on the accompanying Condensed Consolidated Balance Sheets.

Investment income, which was included as a component of other income, consists of interest earned.

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

September 30, 2020

March 31, 2021

(In thousands)

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Money-market funds classified as short-term investments

Cash held in demand deposit accounts of $ 21.1 million and $ 3.1 million is excluded from our fair-value hierarchy disclosure as of September 30, 2020 and December 31, 2019, respectively.

There were no unrealized gains or losses associated with our investments as of September 30, 2020 or December 31, 2019.

Cash held in demand deposit accounts of $ 9.0 million and $ 10.5 million is excluded from our fair-value hierarchy disclosure as of March 31, 2021 and December 31, 2020, respectively.

There were no unrealized gains or losses associated with our investments as of March 31, 2021 or December 31, 2020.

The carrying amounts reported in the accompanying Condensed Consolidated Balance Sheets for receivables, accounts payable, other current monetary assets and liabilities approximate fair value.

See “Note 6—Unsecured Convertible Senior Notes” for the carrying amount and estimated fair value of our 6.25 % Convertible Senior Notes due 2023 .

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

Note 6—Line of Credit

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Under the Line of Credit Agreement, we may draw, on a revolving basis, up to the lesser of $ 50.0 million or 85.0 % of our eligible accounts receivable, less certain reserves.

Interest on amounts outstanding is payable monthly at the greater of 5.5 % and the prime rate.

Interest on amounts outstanding is payable monthly at the greater of 5.5 % or the prime rate.

The line of credit is secured by all our assets excluding intellectual property and development program inventories.

As of September 30, 2020 and December 31, 2019, we had no outstanding borrowings under the Line of Credit Agreement.

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

Note 7—Unsecured Convertible Senior Notes

Unsecured convertible senior notes outstanding at September 30, 2020 and December 31, 2019 are as follows:

Balance as of September 30, 2020

On January 1, 2021, we early adopted ASU 2020-06 on a modified retrospective basis.

ASU 2020-06 removes the separate liability and equity accounting for our outstanding convertible senior notes.

Consequently, we now account for our convertible senior notes wholly as debt.

Adoption of ASU 2020-06 resulted in a cumulative effect adjustment of $ 75.5 million to restore our unsecured convertible notes and additional paid-in capital to the balances without an equity allocation component.

The carrying value of the notes are reflective of their face value less unamortized debt issuance costs.

Interest expense recognized in future periods will be reduced as a result of accounting for the unsecured convertible notes wholly as a liability measured at amortized cost.

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

Balance as of March 31, 2021

(In thousands)

Principal amount

Unamortized discount

Unamortized issuance costs attributable to liability component

Total Convertible Senior Notes, net

Fair value of outstanding Convertible Senior Notes (2)

Amount by which the Convertible Senior Notes if-converted value exceeds their principal amount

Equity component

Unamortized issuance costs

Net carrying amount of equity component (1)

Unamortized debt issuance costs

Total unsecured convertible senior notes, net

Fair value of outstanding unsecured convertible senior notes (1)

Amount by which the unsecured convertible senior notes if-converted value exceeds their principal amount

Balance as of December 31, 2020

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Unamortized issuance costs attributable to liability component

Total Convertible Senior Notes, net

Fair value of outstanding Convertible Senior Notes (2)

Amount by which the Convertible Senior Notes if-converted value exceeds their principal amount

Total unsecured convertible senior notes, net

Fair value of outstanding unsecured convertible senior notes (1)

Amount by which the unsecured convertible senior notes if-converted value exceeds their principal amount

Equity component

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Net carrying amount of equity component (2)

(1) Included in the condensed consolidated balance sheet within additional paid-in capital

(2) The fair value is classified as Level 3 due to the limited trading activity for the Convertible Senior Notes.

2023 Convertible Senior Notes

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

(2) Included in the Condensed Consolidated Balance Sheet within additional paid-in capital at December 31, 2020.

Upon early adoption of ASU 2020-06 on January 1, 2021, amounts were reclassified to unsecured convertible senior notes, net.

2023 Unsecured Convertible Senior Notes

On November 15, 2018, we issued $ 210.0 million in aggregate principal amount of our 6.25 % convertible senior notes (the “2023 Notes”).

The 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 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.

The 2023 Notes will be convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion.

On August 14, 2020, we issued the 5.25 % convertible senior notes (the “2026 Notes”) and used approximately $ 125.6 million of the net proceeds to repurchase $ 115.0 million principal amount of the 2023 Notes (see “2026 Unsecured Convertible Senior Notes” below).

The 2023 Notes are convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion.

The initial conversion rate is 52.0183 shares of our common stock per $ 1,000 of note principal (equivalent to an initial conversion price of approximately $ 19.22 per share of common stock), subject to adjustment in certain circumstances.

To reduce the dilutive impact or potential cash expenditure associated with conversion of the 2023 Notes, we entered into a capped call transaction (the 2023 Capped Call), which essentially covers the number of

shares of our common stock underlying the 2023 Notes when our common stock is trading between the initial conversion price of $ 19.22 per share and $ 28.84 per share.

On August 14, 2020, we issued $ 210.0 million aggregate principal amount of 5.25 % Convertible Senior Notes (the 2026 Notes) and used $ 125.6 million of the net proceeds to repurchase $ 115.0 million principal amount of the 2023 Notes (see “2026 Convertible Senior Notes” below).

The settlement consideration was allocated between the repurchase of the liability and the equity component with the fair value of the liability component estimated to be $ 103.6 million based on the expected future cash flows associated with the $ 115.0 million principal amount discounted at a 9.9 % effective interest rate.

The remaining $ 22.0 million was accounted for as a repurchase of the equity component, reducing additional paid-in capital.

As of the repurchase date of August 14, 2020, the carrying value of the repurchased 2023 Notes, net of unamortized debt discount and issuance costs, was $ 90.2 million.

The difference between the $ 103.6 million fair value of the 2023 Notes repurchased and the carrying value of $ 90.2 million resulted in a $ 13.4 million loss on early extinguishment of debt.

After giving effect to the repurchase, the total principal amount outstanding on the 2023 Notes as of August 14, 2020 was $ 95.0 million.

In connection with the repurchase of $ 115.0 million in principal amount of the 2023 Notes, we entered into a capped call termination contract in August 2020 for approximately 6.0 million underlying shares to unwind a proportionate amount of the 2023 Capped Call.

Upon settlement, the Company received $ 7.5 million in cash and recorded a $ 0.8 million loss due to the change in fair value of the contract between signing and settlement dates.

The proceeds were recorded as an increase in additional paid-in capital and the loss was recorded to other expense in the condensed consolidated statements of operations and comprehensive loss.

As of September 30, 2020, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.

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 is trading between the initial conversion price of $ 19.22 per share and $ 28.84 per share.

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 March 31, 2021, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

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Amortization of debt discount

2026 Convertible Senior Notes

In August 2020, we issued $ 210.0 million aggregate principal amount of 5.25 % convertible senior notes.

In September 2020, an additional $ 15.0 million aggregate principal amount was issued on the partial exercise of the underwriters’ option, which resulted in an aggregate principal amount outstanding of $ 225.0 million.

The issuance of the notes and use of proceeds are below:

(In thousands)

2026 Notes issued

Termination of the 2023 Capped Call contracts related to debt repurchased

Repurchase of 2023 Notes

Purchase of 2026 Capped Call

Issuance costs

Net proceeds available for corporate use

2026 Unsecured Convertible Senior Notes

The 2026 Notes are unsecured and accrue interest at an annual rate of 5.25 % per annum, payable semi-annually in arrears on February 15 and August 15 of each year.

The 2026 Notes mature on February 15, 2026, unless earlier purchased, redeemed or converted in accordance with their terms.

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 upon conversion, subject to adjustment in certain circumstances.

The 2026 Notes are convertible at the option of the holders on or after November 15, 2025 at any time prior to the close of business on February 12, 2026, the second scheduled trading day immediately before the stated maturity date of February 15, 2026.

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 issuable upon conversion, subject to adjustment in certain circumstances.

The 2026 Notes are convertible at the option of the holders on or after November 15, 2025 at any time prior to the close of business on February 12, 2026.

Additionally, holders may convert their 2026 Notes at their option at specified times prior to the maturity date only if:

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(4) we call the 2026 Notes for redemption.

We may elect, at our sole discretion, to convert the 2026 Notes into cash, shares of our common stock or a combination thereof.

Subject to the satisfaction of certain conditions, we may redeem in whole or in part the 2026 Notes at our option beginning August 15, 2023 through the 50th scheduled trading day immediately before the maturity date at a cash redemption price equal to the principal amount of the 2026 Notes to be redeemed plus any accrued and unpaid interest to, but excluding, the redemption date.

The 2026 Notes are subject to redemption only if certain requirements are satisfied, including that the last reported sale price per share of our common stock exceeds 130 % of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice and (ii) the trading day immediately before the date we send such notice.

In order to reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2026 Notes, we entered into capped call transactions in connection with the initial issuance of the 2026 Notes and at the time of the issuance of additional 2026 Notes upon the underwriters’ partial exercise of their option (collectively, the 2026 Capped Call).

The 2026 Capped Call will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2026 Notes, the number of shares of common stock underlying the 2026 Notes when our common stock is trading within the range of approximately $ 18.49 and $ 26.10 .

At our sole discretion, we may elect to convert the 2026 Notes into cash, shares of our common stock or a combination thereof at maturity.

Subject to the satisfaction of certain conditions, beginning August 15, 2023, we may redeem in whole or in part the 2026 Notes at our option at a cash redemption price equal to the principal amount of the 2026 Notes plus any accrued and unpaid interest.

In order to reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2026 Notes, we entered into capped call transactions (the “2026 Capped Calls”).

The 2026 Capped Calls will cover the number of shares of common stock underlying the 2026 Notes when our common stock is trading within the range of approximately $ 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 2026 Capped Call will expire on various dates over the 50 -trading-day period ranging from December 2, 2025 to February 12, 2026, if not exercised earlier.

The 2026 Capped Call is a separate transaction and not part of the terms of the 2026 Notes and was executed separately from the issuance of the 2026 Notes.

The amount paid for the 2026 Capped Call was recorded as a reduction to additional paid-in capital in the condensed consolidated balance sheet.

We evaluated the accounting for the issuance of the 2026 Notes and concluded that 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 its balance sheet, and that the cash conversion guidance applies.

Therefore, proceeds of $ 225.0 million are allocated first to the liability component based on the fair value of non-convertible debt with the residual proceeds allocated to the equity component for the conversion features.

allocated $ 6.8 million in issuance costs associated with the 2026 Notes to the liability and equity component in the same proportion as the $ 225.0 million in proceeds.

Further, we concluded the 2026 Capped Call qualifies for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity in its balance sheet.

Consequently, the fair value of the 2026 Capped Call of $ 23.2 million is classified as equity and will not be subsequently remeasured.

In accounting for the issuance of the 2026 Notes, we separated the 2026 Notes into liability and equity components, using an effective interest rate of 12.5 % to determine the fair value of the liability component.

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

Three and Nine

September 30, 2020

Three Months Ended

March 31, 2021

(In thousands)

1 unchanged sentence

Amortization of debt issuance costs

Amortization of debt discount

Future minimum payments for the 2023 and 2026 Notes as of September 30, 2020 are as follows:

Future minimum payments for the 2023 and 2026 Notes as of March 31, 2021 are as follows:

(In thousands)

2025 and thereafter

Total future minimum payments under the convertible senior notes

Note 8—Leases

We have operating leases related to our office and laboratory space and finance leases for certain laboratory and office equipment as follows:

September 30,

(In thousands)

Operating lease assets

Finance lease assets, net

Total lease assets

Operating leases

Finance leases

Operating leases

Finance leases

Total lease liabilities

The components of total lease cost are as follows:

Nine Months Ended

September 30,

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

We carry various finance leases for laboratory equipment.

Supplemental lease information is as follows:

Three Months Ended

(In thousands)

3 unchanged sentences

Sublease income

Total lease cost

The supplemental cash flow information related to leases is as follows:

Nine Months Ended

September 30,

Net lease cost

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

Three Months Ended

(In thousands)

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows used for operating leases

Operating cash flows used for finance leases

Financing cash flows used for finance leases

Cash payments for operating leases

Cash payments for financing leases

Note 9—Commitments and Contingencies

Lease Agreements

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 September 30, 2020, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $ 48.2 million.

We have various agreements with third parties that would collectively require payment of termination fees totaling $ 35.9 million if we had cancelled the work as of September 30, 2020.

We have various agreements with third parties that would collectively require payment of termination fees if we cancelled work as of March 31, 2021.

Development Milestones and Product Royalties

We have licensed a variety of intellectual property from third parties that we are currently developing or may develop in the future.

These licenses may require milestone payments in connection with clinical development or commercial milestones and/or low single to low double-digit royalties on the net income or net sales of the product.

For the three and nine months ended September 30, 2020 and 2019, development milestones were insignificant.

These licenses may require milestone payments in connection with clinical development or commercial milestones as well as low single to low double-digit royalties on the net income or net sales of the product.

For the three months ended March 31, 2021 and 2020, development milestone expenses were insignificant.

We do not owe any royalties on OMIDRIA.

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 10—Shareholders’ Deficit

Common Stock and Warrants

For the nine months ended September 30, 2020, we received proceeds of $ 5.0 million upon the exercise of stock options which resulted in the issuance of 550,342 shares of common stock.

For the nine months ended September 30,

2019, we received proceeds of $ 5.0 million upon the exercise of stock options which resulted in the issuance of 513,790 shares of common stock.

As of September 30, 2020 and December 31, 2019, we had 243,115 warrants outstanding with a weighted average exercise price of $ 20.68 per share.

Underwritten Public Offering of Common Stock

On August 14, 2020, we sold 6.9 million shares of our common stock at a public offering price of $ 14.50 per share.

After deducting underwriter discounts and offering expenses, we received net proceeds from the transaction of $ 93.7 million.

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 March 31, 2021, we have not sold any shares under this program.

During the three months ended March 31, 2021, a cashless exercise was executed for 43,115 warrants, resulting in the issuance of 24,901 shares of our common stock.

As of March 31, 2021, 200,000 warrants remained outstanding with an exercise price of $ 23.00 per share.

The warrants expire on April 12, 2023.

Interim Condensed Consolidated Statements of Shareholders’ Deficit

3 unchanged sentences

Exercise of stock options

At the market offering costs

Cumulative effect of adopting ASU 2020-06

Stock-based compensation expense

Balance March 31, 2021

Exercise of stock options

Stock-based compensation expense

Balance June 30, 2020

Issuance of common stock in direct offering, net of offering costs

Exercise of stock options

Stock-based compensation expense

Equity component of 2026 Notes, net of issuance costs

Purchases of 2026 Capped Calls

Equity component of early extinguishment of 2023 Notes

Termination of the 2023 Capped Call contracts related to debt repurchased

Tax benefit related to issuance of 2026 Notes, net of extinguishment

Balance September 30, 2020

(In thousands)

3 unchanged sentences

Balance March 31, 2020

Exercise of stock options

Stock-based compensation expense

Balance June 30, 2019

Exercise of stock options

Stock-based compensation expense

Balance September 30, 2019

Note 11—Stock-Based Compensation

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

4 unchanged sentences

Three Months Ended

Nine Months Ended

September 30, 2020

March 31, 2021

Estimated weighted-average fair value

1 unchanged sentence

Expected volatility

Expected term, in years

Expected life, in years

Risk-free interest rate

4 unchanged sentences

Balance at December 31, 2020

Balance at September 30, 2020

Vested and expected to vest at September 30, 2020

Exercisable at September 30, 2020

As of September 30, 2020, there were 3.7 million unvested options outstanding that will vest over a weighted-average period of 2.6 years and 4.0 million shares were available to grant.

Balance at March 31, 2021

Vested and expected to vest at March 31, 2021

Exercisable at March 31, 2021

As of March 31, 2021, there were 3.0 million unvested options outstanding that will vest over a weighted-average period of 2.5 years and 3.9 million shares were available to grant.

The total estimated compensation expense yet to be recognized on outstanding options is $ 22.7 million.

Note 11—Income Taxes

We have a history of losses and therefore have historically not made a provision for income taxes.

However, in the quarter ended September 30, 2020, we recorded an income tax benefit of $ 7.9 million related to the issuance of our 2026 Notes (see “Note 6 —Unsecured Convertible Senior Notes”).

In accordance with intra-period tax allocation rules, the deferred tax liability related to the equity component of convertible debt is a source of income that can be used to recognize the tax benefit of the current year loss through continuing operations.

The tax benefit related to the issuance of our 2026 Notes will not recur in subsequent years.

Deferred income taxes reflect the tax effect of net operating loss and tax credit carryforwards and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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-Q

Item 1. Financial Statements