What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-01 compared with 2021-03-01 · 262 added, 228 removed, 525 unchanged (48% of the section changed)

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Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statement of Shareholders’ Deficit

Consolidated Statement of Shareholders’ Equity (Deficit)

Consolidated Statements of Cash Flows

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Omeros Corporation (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, shareholders' deficit and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

We have audited the accompanying consolidated balance sheets of Omeros Corporation (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S.

generally accepted accounting principles.

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Adoption of ASU No.

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method for accounting for leases in 2019 due to the adoption of ASU No.

2016-02, Leases (Topic 842).

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for convertible instruments in 2021 due to the adoption of ASU No.

2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical

audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

to determine the experience ratio.

In particular, management was required to estimate patient rebates for which claims have not been submitted to the Company as of December 31, 2020.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Deductions

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As more fully described in Note 2 of the consolidated financial statements, product sales to wholesalers are recorded net of revenue deductions.

For the year ended December 31, 2020, revenue deductions totaled $33.4 million.

Certain of these revenue deductions require estimates of inventory at wholesalers and ASCs as well as the application of an experience ratio based on historical and projected discounts and rebate claims.

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We also assessed the historical accuracy of management’s estimates by comparing previous estimates to actual activity in subsequent periods.

Accounting for convertible senior notes

OMIDRIA Contract Royalty Asset

Description of the Matter

During 2020, the Company issued $225 million of 5.25% Convertible Senior Notes due 2026 (the “2026 Notes”).

As discussed in Note 8 of the consolidated financial statements, the 2026 Notes include conversion terms that require the Company to account for the debt and equity components of the instruments separately, including allocating value to the debt component with the remaining value allocated to the equity component reflected as a debt discount to be amortized to interest expense over the term of the notes.

Auditing management’s conclusions related to the value allocated to the debt portion of the Convertible Note is complex and involves estimation to determine the effective yield that the Company would have received on the debt issuance had it not included a conversion feature.

As more fully described in Note 2 of the financial statements, the Company recorded a contract asset in connection with its sale of OMIDRIA to Rayner Surgical, Inc.

on December 23, 2021.

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

Auditing management’s forecasts is complex and requires judgment due to the level of estimation uncertainty and the sensitivity of the asset’s value to changes in assumptions.

In particular, the value of the OMIDRIA contract royalty asset is sensitive to changes in significant assumptions such as forecasted royalties due from Rayner Surgical, Inc.

in various scenarios, the probability-weighting of those scenarios, and the discount rate applied, which are affected by expectations about future market and regulatory conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company’s initial 2026 Notes accounting process including controls over the Company’s review of the valuation methodology and related key assumptions used to determine the fair value of the debt component.

To test the initial accounting for the 2026 Notes, our audit procedures included, among others, inspection of the debt agreement and testing management’s application of the relevant accounting guidance.

To test the value assigned to the debt and equity components, we performed audit procedures involving our valuation specialists to evaluate the Company’s determination of the fair value of the debt absent of any conversion feature.

This included testing the appropriateness of the methodology and underlying assumptions used, performing independent comparable calculations, and evaluating the sensitivity of management’s key assumptions.

We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over management’s process for measuring the OMIDRIA contract royalty asset.

To test the measurement of the OMIDRIA contract royalty asset, we performed audit procedures that included, among others, evaluating (1) the estimated future royalties in various scenarios, (2) management’s relative weighting of those scenarios, and (3) the discount rate applied.

We compared estimated future royalties to the Company’s historical revenues and royalty rates in the asset purchase agreement.

We evaluated the appropriateness and likelihood of occurrence of the various scenarios included in management’s calculation, given the Company’s experience and industry trends.

We involved valuation specialists to assist in our testing of the discount rate and verified the clerical accuracy of the calculation.

We also evaluated the Company’s disclosures in the consolidated financial statements related to these matters.

/s/ Ernst & Young LLP

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Short-term investments

OMIDRIA contract royalty asset, short-term

Receivables, net

Prepaid expense and other assets

Current assets from discontinued operations

Total current assets

OMIDRIA contract royalty asset

Property and equipment, net

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Advanced payments, non-current

Liabilities and shareholders’ deficit

Liabilities and shareholders’ equity (deficit)

Current liabilities:

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Unsecured convertible senior notes, net

Other accrued liabilities - noncurrent

Commitments and contingencies (Note 11)

Shareholders’ deficit:

Shareholders’ equity (deficit):

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

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Accumulated deficit

Total shareholders’ deficit

Total liabilities and shareholders’ deficit

Total shareholders’ equity (deficit)

Total liabilities and shareholders’ equity (deficit)

See accompanying Notes to Consolidated Financial Statements

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Total costs and expenses

Loss from operations

Loss from continuing operations

Loss on early extinguishment of debt

Interest expense

Loss before income tax benefit

Loss from continuing operations before income tax benefit

Income tax benefit

Comprehensive loss

Basic and diluted net loss per share

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

Net loss from continuing operations

Net income from discontinued operations, net of tax

Net income (loss)

Basic and diluted net income (loss) per share

Net loss from continuing operations

Net income from discontinued operations

Net income (loss)

Weighted-average shares used to compute basic and diluted net income (loss) per share

See accompanying Notes to Consolidated Financial Statements

OMEROS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

Shareholders’

Balance at December 31, 2017

Issuance of common stock upon exercise of stock options

Issuance of warrants in connection with debt amendment

Stock-based compensation

Purchase of 2023 Capped Calls

Equity component of 2023 Notes, net of issuance costs

Income tax benefit related to issuance of 2023 Notes

Equity/(Deficit)

Balance at December 31, 2018

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Balance at December 31, 2020

Issuance of common stock upon exercise of stock options and warrants

Issuance of common stock upon grant of restricted stock awards

At the market offering fees

Stock-based compensation

Cumulative effect of adopting ASU 2020-06

Balance at December 31, 2021

See accompanying Notes to Consolidated Financial Statements

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Operating activities:

Net income (loss)

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

Stock-based compensation expense

Gain on the sale of OMIDRIA, gross

Non-cash interest expense

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Prepaid expenses and other assets

Accounts payable and accrued expenses

Accounts payable and other expense

Other liabilities non-current

Net cash used in operating activities

Investing activities:

Cash proceeds for the sale of OMIDRIA

Purchases of property and equipment

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Proceeds from the sale and maturities of investments

Net cash (used in) provided by investing activities

Net cash provided by (used in) investing activities

Financing activities:

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Payments for debt issuance costs

Proceeds from debt borrowings

Purchases of capped calls related to convertible senior notes

Payments for repurchases of convertible senior notes

Repayment of debt

Payments on debt prepayment and extinguishment

Proceeds from termination of capped call contracts

Proceeds from issuance of common stock, net

Proceeds upon exercise of stock options and warrants

Release in restricted investments

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

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Property acquired under finance lease

Conversion of accrued interest to debt

Fair value of warrants issued in connection with debt amendment

See accompanying Notes to Consolidated Financial Statements

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Note 1—Organization and Basis of Presentation

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, 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.

Omeros Corporation (“Omeros,” the “Company” or “we”) is a clinical-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting immunologic diseases, including complement-mediated diseases and cancers related to dysfunction of the immune system, as well as addictive and compulsive disorders.

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

We sold OMIDRIA and related business assets on December 23, 2021.

See “Sale of OMIDRIA Assets” below for additional information.

Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) pending before the U.S.

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

On October 18, 2021, we announced the receipt of a Complete Response Letter (“CRL”) from FDA regarding the BLA.

In the CRL, FDA expressed difficulty in estimating the treatment effect of narsoplimab in HSCT-TMA and asserted that additional information will be needed to support regulatory approval.

In February 2022, we had a Type A meeting with FDA to discuss the CRL, including each of the review issues that FDA identified as presenting difficulties interpreting the treatment response in the pivotal trial.

We are currently awaiting FDA’s response to our rebuttals to each of those review issues.

We continue to believe that our BLA, as submitted, merits approval and that the data meet or exceed the threshold for substantial evidence of effectiveness.

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.

Sale of OMIDRIA Assets

On December 23, 2021, we closed on an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rayner Surgical Inc.

(“Rayner”) for the sale of our commercial product OMIDRIA and certain related assets including inventory and prepaid expenses (the “Transaction”).

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

We will receive a royalty on worldwide sales of OMIDRIA and potentially a $ 200.0 million milestone payment if separate payment for OMIDRIA is secured in the U.S.

for a continuous period of at least four years before January 1, 2025.

As a result of the divestiture, the results of OMIDRIA operations (e.g., revenues and operating costs) have been reclassified to discontinued operations in our consolidated statements of operations and comprehensive loss and excluded from continuing operations for all periods presented (See “Note 3 – Discontinued Operations”).

Basis of Presentation

Our consolidated financial statements include the financial position and results of operations of Omeros Corporation (Omeros) and our wholly owned subsidiaries.

Our consolidated financial statements include the financial position and results of operations of Omeros and our wholly owned subsidiaries.

All inter-company transactions have been eliminated.

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Risks and Uncertainties

Pass-through reimbursement for OMIDRIA under Medicare Part B expired on October 1, 2020, and consequently, our net revenues for September and the fourth quarter of 2020 were significantly reduced.

In December 2020, the Centers for Medicare & Medicaid Services (CMS) confirmed that OMIDRIA, as an otherwise policy packaged drug following OMIDRIA’s expiration of pass-through status on October 1, 2020, qualifies for separate payment when used on Medicare Part B patients in the ambulatory surgery center (ASC) setting under CMS’ policy for non-opioid pain management surgical drugs.

CMS made separate payment for OMIDRIA under this policy effective retroactively as of October 1.

CMS’ current non-opioid separate payment policy and, as a result, separate payment for OMIDRIA thereunder, like other CMS policies in the OPPS and ASC systems, can be changed by CMS through its OPPS/ASC annual rulemaking and comment process.

The outbreak of the novel strain of coronavirus 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.

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;

As of December 31, 2021, we had cash, cash equivalents and short-term investments of $ 157.3 million and outstanding accounts receivable of $ 38.2 million.

Our loss from continuing operations for the year ended December 31,

2021 was $ 191.5 million.

This loss from operations does not include the $ 80.1 million in earnings from OMIDRIA included in discontinued operations which occurred prior to the sale, a large portion of which we expect to retain through royalties and expense reductions on a go forward basis.

We plan to continue to fund our operations for the next twelve months with our existing cash and investments, our current accounts receivable, and OMIDRIA royalties.

There is also the potential for us to receive a $ 200.0 million milestone related to achievement of long-term OMIDRIA separate payment.

If FDA approval is granted for narsoplimab for HSCT-TMA within the next twelve months, sales of narsoplimab will also provide funds for our operations .

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.

Management believes the assets on hand along with expected royalties received are adequate to finance our operations at least through March 2, 2023.

Accordingly, the accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

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

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

We have filed our narsoplimab BLA application for HSCT-TMA with FDA.

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

Currently we cannot fully predict, if and when approved, 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 in advance of or following the current PDUFA date.

If appropriate, we will adjust the timing and associated costs of our HSCT-TMA launch activities as we advance through the 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.

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.

We may also sell shares of our common stock through our “at the market” equity offering program.

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 all or a portion of any of our existing technologies.

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.

We operate in one segment.

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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 and manufacturing of drug product.

Significant items subject to such estimates include revenue recognition, OMIDRIA contract royalty asset valuation, stock-based compensation expense, and accruals for clinical trials and manufacturing of drug product.

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

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Note 2—Significant Accounting Policies

Discontinued Operations

We review the presentation of planned or completed business dispositions in the consolidated financial statements based on the available information and events that have occurred.

The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business and, if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results.

Planned or completed business dispositions are presented as discontinued operations when all the criteria described above are met.

For those divestitures that qualify as discontinued operations, all comparative periods presented are reclassified in the consolidated balance sheets.

Additionally, the results of operations of a discontinued operation are reclassified to income from discontinued operations, net of tax, for all periods presented in the consolidated statements

of operations and comprehensive loss.

Results of discontinued operations include all revenues and expenses directly derived from such businesses;

general corporate overhead is not allocated to discontinued operations.

The OMIDRIA asset sale to Rayner qualifies as a discontinued operation and has been presented as such for all reporting periods presented.

The Company included information regarding cash flows from discontinued operations (see “Note 3 – Discontinued Operations”).

OMIDRIA Royalties and OMIDRIA Contract Royalty Assets

Upon the closing of the Transaction, 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.

The sale of OMIDRIA qualifies as an asset sale.

To measure the OMIDRIA contract royalty asset, we used the expected value approach which is the sum of the discounted probability-weighted royalty payments, net of tax, we would receive using a range of potential outcomes, to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur.

Accordingly, the contract royalty asset excludes the achievement of the $ 200.0 million milestone payment and any foreign royalties to the extent it is probable that a significant reversal in the amount of cumulative income recognized will not occur.

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 received different from the expected royalties recorded at closing.

The OMIDRIA contract royalty asset will also 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 into discontinued operations.

Cash and Cash Equivalents, Short-Term Investments and Restricted Investments

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Short-term investment securities are classified as available-for-sale and are carried at fair value.

Unrealized gains and losses, if any, are reported as a separate component of shareholders’ deficit.

Unrealized gains and losses, if any, are reported as a separate component of shareholders’ equity.

Amortization, accretion, interest, and dividends, realized gains and losses and declines in value judged to be other-than-temporary are included in other income.

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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.

Capitalization of costs as inventory begins when regulatory approval of the drug 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.

We expense inventory costs related to drug 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.

Inventory with an alternative future use is capitalized.

Receivables, Net

Receivables relate primarily to sales of OMIDRIA to wholesalers and include reductions for estimated chargebacks and product returns that are expected to be settled through reductions in receivables.

Remaining receivables consist of amounts from subleases for space in our facilities.

Receivables relate primarily to sales of OMIDRIA made to wholesalers prior to the sale to Rayner and include reductions for estimated chargebacks and product returns that are expected to be settled through reductions in

Remaining receivables generally consist of amounts from subleases for space in our facilities.

Considering the nature and historic collectability of our receivables, we concluded an allowance for doubtful accounts is not necessary as of December 31, 2021 and 2020.

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Right-of-Use Assets and Related Lease Liabilities

On January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases, (Topic 842) using a modified retrospective approach versus recasting the prior periods presented.

We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical assessment of whether (i) contracts contain leases, (ii) lease classifications and (iii) initial direct costs.

Upon adoption we recognized right-of-use assets and lease liabilities of $ 17.7 million and $ 26.4 million, respectively.

The balance of the net right-of-use asset included the reversal of the outstanding balance of deferred rent of $ 8.7 million.

We record operating leases as right-of-use assets and recognize the related lease liabilities equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available.

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Unsecured Convertible Senior Notes

In November 2018, we issued $ 210.0 million in aggregate principal amount of our 6.25 % Convertible Senior Notes (the 2023 Notes) and, in August and September 2020, we issued $ 225.0 million in aggregate principal amount of our 5.25 % Convertible Senior Notes (the 2026 Notes).

We used a portion of the proceeds from the 2026 Notes to repurchase $ 115.0 million principal amount of the 2023 Notes and the related capped call (see “Note 8--Unsecured Convertible Senior Notes”) and used the remainder for general corporate purposes.

The 2023 and 2026 Notes are accounted for in accordance with Accounting Standards Codification (ASC) Subtopic 470-20, Debt with Conversion and Other Options .

Pursuant to ASC Subtopic 470-20, we account 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, which we amortize as non-cash interest expense over the term of the notes using the effective interest rate method.

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 should be evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms.

The 2023 Notes repurchase and issuance of the 2026 Notes were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange.

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 that was required under previous guidance and allows us to account for our convertible senior notes wholly as debt.

Upon adoption, we removed the equity component allocated to debt issuance costs increasing unsecured convertible senior notes and shareholders’ equity by $ 75.5 million.

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.

The 6.25 % Convertible Senior Notes (the “2023 Notes”) repurchase and issuance of the 5.25 % Convertible Senior Notes (“2026 Notes”) were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange.

Therefore, the repurchase of the 2023 Notes was accounted for as a debt extinguishment.

(See “Note 9 – Unsecured Convertible Senior Debt”).

Impairment of Long-Lived Assets

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Recoverability of these assets is measured by comparing the carrying value to future undiscounted cash flows that the asset is expected to generate.

If the asset is considered to be impaired, the amount of any impairment will be reflected in the results of operations in the period of impairment.

If the asset is impaired, the amount of any impairment will be reflected in the results of operations in the period of impairment.

We have not recognized any impairment losses for the years ended December 31, 2021, 2020 and 2019.

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Chargebacks are generally settled within four weeks of recording product sales revenue.

We provide reimbursement support services and financial assistance in the form of a rebate to patients whose commercial insurance is inadequate to cover the full cost of OMIDRIA.

We provide reimbursement support services and financial assistance in the form of a rebate to patients whose commercial insurance is inadequate to cover the full cost of our drug product.

We apply an experience ratio based on historical and projected patient claims.

This experience ratio is applied to product sales to determine the patient rebate accrual and is being reviewed and updated periodically to reflect actual results.

We provide rebate payments for which ASCs qualify by meeting or exceeding purchase volumes of OMIDRIA under our purchase volume-discount program.

We calculate rebate payment amounts due under this program based on actual qualifying purchase volumes and apply a contractual discount rate.

For purchases of OMIDRIA not yet reported as sold-through to the ASC by our wholesalers, we apply an experience ratio to product sales to determine the rebate accrual.

This experience ratio is being reviewed and updated periodically to reflect actual results.

Distribution Fees and Product Return Allowances

We pay our wholesalers a distribution fee for services that they perform for us based on the wholesaler average cost value of their purchases of OMIDRIA.

We pay our wholesalers a distribution fee for services that they perform for us based on the wholesaler average cost value of their purchases.

We record a provision against product sales for these charges at the time of sale to the wholesaler.

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Additionally, selling, general and administrative expenses include marketing and selling expenses, professional and legal services;

patent costs;

depreciation, an allocation of our occupancy costs;

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Major Customers

We sell OMIDRIA through a limited number of wholesalers.

Each of these wholesalers, together with entities under their common control, accounted for greater than 10% of our total revenues for the years ended December 31, 2020, 2019 and 2018 and greater than 10% of accounts receivable as of December 31, 2020, 2019 and 2018 as noted below.

Prior to the sale of OMIDRIA to Rayner, we sold OMIDRIA through a limited number of wholesalers.

Each of these wholesalers, together with entities under their common control, accounted for greater than 10% of our total

revenues for the years ended December 31, 2021, 2020 and 2019 and greater than 10% of accounts receivable as of December 31, 2021, 2020 and 2019 as noted below.

Distributor A

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Distributor D

Major Suppliers

We use a single contract manufacturer to supply the OMIDRIA drug product and a separate company to package OMIDRIA for commercial sale.

We generally use different contract manufacturers to produce drug substance, drug product and to perform final packaging for our drug product candidates.

We endeavor to maintain reasonable levels of drug supply for our commercial and clinical trial use and other manufacturers are available should we need to change suppliers.

A change in suppliers, however, could cause a delay in delivery of OMIDRIA or our clinical trial material that would adversely affect our business.

Recent Accounting Pronouncements

In June 2016, the FASB 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.

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

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software , (Subtopic 350-40) related to the accounting for cloud computing arrangements to follow the internal-use software guidance in determining which development costs to defer and recognize as an asset.

We adopted the standard January 1, 2020 on a prospective basis.

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.

Note 3—Discontinued Operations

On December 23, 2021, we closed an Asset and Purchase Agreement for the sale of OMIDRIA and certain related assets including inventory and prepaid expenses.

We retained the outstanding accounts receivable and all outstanding liabilities related to OMIDRIA as of the closing date.

Upon closing, we received an up-front cash payment of $ 126.0 million.

We will also receive a 50 % royalty on OMIDRIA net sales in the U.S.

between December 23, 2021 and the earlier of January 1, 2025 or the payment of the $ 200.0 million milestone described below.

After such date, we will receive a 30 % royalty on OMIDRIA net sales in the U.S.

base royalty rate”) until the expiration or termination of the last issued and unexpired U.S.

base royalty rate is reduced to 10 % upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment.

We will also receive a royalty of 15 % on OMIDRIA net sales outside the U.S.

on a country-by-country basis between the closing date and the expiration or termination of the last issued and unexpired OMIDRIA patent in such country.

We will receive a $ 200.0 million milestone payment if, prior to January 1, 2025, separate payment for OMIDRIA is secured in the U.S.

for a continuous period of at least four years .

The sale of OMIDRIA was recorded as an asset sale and all comparative periods presented are required to be reclassified in the consolidated balance sheets.

Additionally, the results of operations for OMIDRIA are reclassified to income from discontinued operations for all periods presented in the consolidated statements of operations and comprehensive loss.

Net income from discontinued operations, net of tax is as follows:

Year Ended December 31,

(In thousands)

Product sales, net

Royalty income

OMIDRIA income

Costs and expenses:

Cost of product sales

Research and development

Selling, general and administrative

Total costs and expenses

Income before income tax expense

Income tax expense

Net income from discontinued operations, net of tax

Gain on sale of OMIDRIA, net

Net income from discontinued operations, net of tax

The gain on the sale of OMIDRIA included in discontinued operations for the year ended December 31, 2021 is as follows:

(In thousands)

Cash proceeds

OMIDRIA contract royalty asset

Gain on sale of OMIDRIA, gross

Transaction and closing costs

Restricted Stock Units ("RSUs") granted to transferred employees

Prepaid assets and inventory at cost

Gain on sale of OMIDRIA, net

Cash flow from discontinued operations is as follows:

Year Ended December 31,

(In thousands)

Total operating cash flows from discontinued operations

Total investing cash flows from discontinued operations

Note 4—Net Loss Per Share

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

Our potentially dilutive securities include potential common shares related to our stock options, warrants, restricted stock units 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.

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Year Ended December 31,

2023 Notes convertible to common stock (1)

Outstanding options to purchase common stock

Outstanding restricted stock units

Outstanding warrants to purchase common stock

Total potentially dilutive shares excluded from loss per share

(1) The 2023 Notes are subject to a capped call arrangement that potentially reduces the dilutive effect as described in “Note 9 — Unsecured Convertible Senior Notes”.

Any potential impact of the capped call arrangement is excluded from this table.

Note 5—Accounts Receivable, Net

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(In thousands)

Money-market funds classified as non-current restricted investments

Money-market funds classified as short-term investments

Money-market funds classified as non-current restricted investments

December 31, 2020

(In thousands)

Money-market funds classified as non-current restricted investments

Money-market funds classified as short-term investments

Money-market funds classified as non-current restricted investments

Cash held in demand deposit accounts of $ 100.8 million and $ 10.5 million is excluded from our fair-value hierarchy disclosure as of December 31, 2021 and 2020, respectively.

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Note 7—Certain Balance Sheet Accounts

Inventory consists of the following:

(In thousands)

Raw materials

Work-in-progress

Finished goods

Total inventory

Property and Equipment, Net

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(In thousands)

Contract research and development

Sales rebates, fees and discounts

Consulting and professional fees

Interest payable

Contract research and development

Employee compensation

Sales rebates, fees and discounts

Clinical trials

1 unchanged sentence

Total accrued expenses

In October 2016, we entered into a note payable agreement (the Note) with CRG Servicing LLC (“CRG”) and borrowed $ 80.0 million.

In May 2018, we borrowed the remaining $ 45.0 million available under the Note and issued to CRG warrants to purchase up to 200,000 shares of our common stock with an exercise price of $ 23.00 per share and total fair value of $ 1.4 million.

In November 2018, we issued $ 210.0 million in principal amount of unsecured convertible senior notes (see “Note 8—Unsecured Convertible Senior Notes”) and repaid the Note.

Upon repayment, we incurred a loss on early extinguishment of debt of $ 13.0 million associated with the unamortized lender facility fee, debt issuance costs, debt discount and prepayment fees upon repayment of the Note.

Line of Credit

Note 8—Line of Credit

We have a Loan and Security Agreement with Silicon Valley Bank (“SVB”), which provides for a $ 50.0 million revolving line of credit facility (the “Line of Credit Agreement”).

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

Line of Credit Agreement is secured by all our assets excluding intellectual property and development program inventories and matures in August 2022.

The Line of Credit Agreement is secured by all our assets excluding intellectual property and development program inventories and matures in August 2022.

In connection with the execution of the Asset Purchase Agreement, on December 1, 2021 the Company and SVB entered into a Consent and Second Amendment to the Line of Credit Agreement, under which SVB provided its consent to the Transaction and release of liens with respect to the transferred assets.

In addition, the amendment revised the original Line of Credit Agreement to provide that the borrowing base will include 85 % of eligible monthly royalty payments, including those from the Rayner and its affiliates, less applicable discounts, credits and other offsets.

Interest on amounts outstanding is payable monthly at a floating rate equal to the greater of 5.50 % and the prime rate per annum.

If the Line of Credit Agreement is terminated prior to the maturity date for any reason other than replacement with a new SVB credit facility or a new syndicated facility in which SVB acts as the agent, we are required to pay a termination fee of $ 1.0 million.

We paid an initial commitment fee of $ 150,000 upon closing and are required to pay additional commitment fees of $ 150,000 on each of the first and second anniversaries of the closing date, or upon the earlier termination of, or default under, the Line of Credit Agreement.

The Line of Credit Agreement requires a lockbox arrangement whereby our trade accounts receivable collections are deposited into a control account.

Amounts deposited in the account are transferred daily to our operating account, except that during periods of reduced liquidity or upon an event of default, the amounts received in the control account are applied to reduce the outstanding obligations under the Line of Credit Agreement.

The Line of Credit Agreement includes customary events of default that include, among other things, breach, non-payment, inaccuracy of representations and warranties, the occurrence of a material adverse change in our business or prospects for repayment of the Line of Credit, cross default to material indebtedness or material agreements, bankruptcy and insolvency, material judgments and a change in control.

We paid an initial commitment fee of $ 150,000 upon closing and have paid additional commitment fees of $ 150,000 on each of the first and second anniversaries of the closing date.

The Line of Credit Agreement includes customary events of default that include, among other things, breach, non-payment, inaccuracy of representations and warranties, the occurrence of a material adverse change in our business or prospects for repayment of the Line of Credit Agreement, cross default to material indebtedness or material agreements, bankruptcy and insolvency, material judgments and a change in control.

In the event of default, SVB may require all obligations under the Line of Credit Agreement to be immediately due and payable and charge a default rate of interest thereon.

Additionally, under the loan and security agreement with SVB, we have agreed not to pay any dividends.

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

As of December 31, 2021 and 2020, we had no outstanding borrowings under the Line of Credit Agreement.

Note 9—Unsecured Convertible Senior Notes

On January 1, 2021, we adopted 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.

Upon adoption, we removed the equity component allocated to debt issuance costs increasing unsecured convertible senior notes and shareholders’ equity by $ 75.5 million.

In November 2018, we issued $ 210.0 million in aggregate principal amount on our 2023 Notes, and in August and September 2020, we issued an aggregate principal amount of $ 225.0 million on our 2026 Notes.

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Principal amount

Unamortized discount

Unamortized issuance costs attributable to liability component

Total Convertible Senior Notes, net

Fair value of outstanding Convertible Senior Notes (1)

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

Equity component

Issuance costs

Net carrying amount of equity component (2)

Balance as of

December 31, 2019

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

(In thousands)

2 unchanged sentences

Unamortized issuance costs attributable to liability component

Total Convertible Senior Notes, net

Fair value of outstanding Convertible Senior Notes (1)

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

Issuance costs

Unamortized issuance costs

Net carrying amount of equity component (2)

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

We received net proceeds of $ 24.0 million as summarized below:

(In thousands)

2023 Notes principal amount issued

Repayment of previously outstanding note payable (see "Note 7--Debt")

Purchase of 2023 Capped Call

Issuance costs

Net proceeds available for corporate use

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

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Year Ended December 31,

(In thousands)

Contractual interest expense

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

December 31, 2020

Year Ended December 31,

(In thousands)

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Amortization of debt discount

Future minimum payments for the 2023 and 2026 Notes as of December 31, 2020 are as follows:

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

(In thousands)

Total future minimum payments under the convertible senior notes

Total future minimum principal payments under the convertible senior notes

Note 10—Lease Liabilities

1 unchanged sentence

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

We have finance leases for certain laboratory and office equipment that have lease terms expiring through December 2024.

We have finance leases for certain laboratory and office equipment that have lease terms expiring through March 2025.

Lease-related assets and liabilities recorded on the balance sheet are as follows:

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The components of total lease costs are as follows:

Year Ended December 31,

(In thousands)

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The supplemental cash flow information related to leases during 2021 is as follows:

Year Ended December 31,

(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

The future maturities of our lease liabilities as of December 31, 2021 are as follows:

3 unchanged sentences

Total lease liabilities

As of December 31, 2020, we have committed to additional leased space in the building located at 201 Elliott Avenue West, Seattle, Washington (the “Omeros Building”) that will commence in February 2021.

The lease terms are consistent with our existing leases in The Omeros Building, and the monthly lease payments are approximately $ 0.1 million.

In January 14, 2022, we entered into an agreement with our landlord to early terminate a portion of the rentable square footage of our office and lab premises.

Effective December 31, 2021, the square footage was reduced by 13,904 square feet.

Note 11—Commitments and Contingencies

2 unchanged sentences

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

These licenses may require milestone payments during the clinical development processes as well as low single to low double-digit royalties on the net income or net sales of the product.

For the year ended December 31, 2020, we paid $ 5.5 million in technology access fees upon entering new agreements.

Milestone payments were not material for the years ended December 31, 2019 and 2018.

These licenses may require milestone payments during the clinical development processes or upon approval of commercial sale as well as low single to low double-digit royalties on the net income or net sales of the product.

For the years ended December 31, 2021 and December 31, 2020, we paid $ 0.5 million and $ 5.5 million in technology access fees.

Note 12—Shareholders’ Equity

1 unchanged sentence

Options granted and outstanding

Options available for future grant

Restricted stock units granted and outstanding

Common stock warrants

Awards available under issuance under the 2017 Plan

Total shares reserved

3 unchanged sentences

After deducting underwriter discounts and offering expense, we received net proceeds from the transaction of $ 54.2 million.

At the Market Sales Agreement – 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.

At the Market Sales Agreement – We have 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.

In connection with various previously outstanding debt agreements we have issued warrants to purchase shares of our common stock as follows:

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Vesting Schedule

Employee initial grants

Employee initial options grants

25 % at one-year anniversary, 1/48 monthly thereafter

Employee recurring grants

1 /48 monthly

Board member initial grants

Employee recurring options grants

Board member initial options grants

33 +% per year for 3 years

Board member recurring grants

Board member recurring options grants

100 % after one year

Non-employee consultant grants

1 /12 monthly

Non-employee consultant grants

1 /48 monthly

In November 2020, restricted stock awards totaling 14,000 shares with a fair value of $ 11.05 per share were granted to sales employees.

Non-employee consultant options grants

1/12 or 1/48 monthly

Employee RSUs

50 % after one year, 50 % after two years

In November 2020, restricted stock awards (“RSA’s”) totaling 14,000 shares with a fair value of $ 11.05 per share were granted to OMIDRIA sales employees.

The awards vested immediately upon grant.

In November 2021, RSA’s totaling 11,700 shares with a fair value of $ 7.80 per share were granted to OMIDRIA sales employees.

The awards vested immediately upon grant.

In December 2021, the Company granted 222,000 shares of RSUs with a fair value of $ 7.53 per share to employees of the Company who accepted offers to transition to Rayner after December 31, 2021.

Stock-based compensation expense is as follows:

1 unchanged sentence

(In thousands)

Continuing operations

Research and development

Selling, general and administrative

Total stock-based compensation in continuing operations

Discontinued operations

Total Stock-based compensation

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

23 unchanged sentences

Note 14—Income Taxes

The components of income tax benefit are as follows:

The components of income tax benefit from continuing operations are as follows:

(In thousands)

Current income tax benefit:

Total current income tax benefit

Deferred income tax benefit:

Total deferred income tax benefit

Income tax benefit

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

However, in 2020 and 2018 we recorded an income tax benefit of $ 12.0 million and $ 12.9 million related to the issuance of our 2026 and 2023 Notes, respectively.

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.

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.

Current income tax expense:

Total current income tax expense

Deferred income tax expense (benefit)

Total deferred income tax expense (benefit)

Income tax expense (benefit)

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.

ASU 2019-12 eliminates 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.

As the Company prospectively adopted ASU 2019-12 January 1, 2021, we did not apply any intraperiod allocation rules to 2021.

To reflect intra-period tax allocation rules in prior years, we reclassified the tax benefit of income from discontinued operations to offset losses from continuing operations.

During 2020, we recorded an income tax benefit of $ 23.3 million comprising $ 12.0 million related to the issuance of our 2026 and 2023 Notes, and an additional $ 11.2 million income tax benefit related to the sale of OMIDRIA assets to Rayner into income from continuing operations.

During 2019, we recorded $ 19.8 million of income tax benefit into continuing operations related to OMIDRIA assets sold to Rayner.

Under intraperiod allocation rules, the deferred tax liability related to the convertible debt and income earned from the sale of assets to Rayner, is a source of income that can be used to recognize the tax benefit of the current year loss through continuing operations.

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

For the year ended December 31, 2021, we recorded state income tax expense of $ 1.0 million as a component of net income from discontinued operations, net of tax related to the sale of OMIDRIA to Rayner which could not be offset by net operating losses and tax credit carryforwards.

The $ 0.3 million income tax payable is included in accrued expense in

our consolidated balance sheet as of December 31, 2021 and $ 0.7 million of deferred income tax liability is included in the table below.

Significant components of deferred income taxes are as follows:

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Property and equipment

Gain on discontinued operations

Equity component of Convertible Notes

3 unchanged sentences

Less valuation allowance

Net deferred tax assets

Net deferred tax liabilities

Net deferred tax liabilities are are included as other accrued liabilities – noncurrent in our consolidated balance sheet as of December 31, 2021.

As of December 31, 2021 and 2020, we had federal net operating loss carryforwards of approximately $ 630.6 million and $ 658.8 million, respectively, and state net operating losses of approximately $ 245.1 million and $ 257.1 million, respectively.

1 unchanged sentence

To date, we have not completed a Section 382 study.

Unless previously utilized, net operating losses of $ 409.0 million generated prior to 2018 will expire between

2021 and 2037.

Unless previously utilized, net operating losses of $ 407.7 million generated prior to 2018 will expire between 2032 and 2037.

The net operating loss of $ 251.5 million generated after 2018 should carryforward indefinitely.

1 unchanged sentence

We have established a 100 % valuation allowance due to the uncertainty of our ability to generate sufficient taxable income to realize the deferred tax assets.

Our valuation allowance increased $ 37.8 million and $ 23.9 million in 2020 and 2019, respectively, primarily due to net operating losses incurred during these periods.

Reconciliation of income tax computed at federal statutory rates to the reported provisions for income taxes is as follows:

During 2021, our valuation allowance decreased $ 19.3 million due to utilizing NOLs to offset our income from discontinued operations.

During 2020 our valuation allowance increased $ 37.8 million primarily due to incurring net operating losses during these periods.

Reconciliation of income tax computed at federal statutory rates to the reported provisions for income taxes on continuing operations is as follows:

Year ended December 31,

4 unchanged sentences

We file federal and certain state income tax returns, which provides varying statutes of limitations on assessments.

However, because of net operating loss carryforwards, substantially all of our tax years remain open to federal and state tax examination.

However, because of net operating loss carryforwards, substantially all our tax years remain open to federal and state tax examination.

We recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense.

6 unchanged sentences

All employees are eligible to participate.

Note 15—Quarterly Information (Unaudited)

The following table summarizes the unaudited statements of operations and comprehensive loss for each quarter of 2020 and 2019 (in thousands, except per share amounts):

For the Quarter Ended

September 30,

Product sales, net (1)

Total costs and expenses

Loss from operations

Basic and diluted net loss per share

For the Quarter Ended

September 30,

Product sales, net

Total costs and expenses

Loss from operations

Basic and diluted net loss per share

(1) The COVID-19 pandemic led to a reduction in the number of elective cataract procedures from mid-March 2020 through late June 2020.

In August 2020, the Centers for Medicare and Medicaid Services, the federal agency responsible for administering the Medicare program, confirmed the October 1, 2020 expiration of pass-through reimbursement for OMIDRIA under Medicare Part B, and consequently, our net revenues for September and the fourth quarter of 2020 were significantly reduced.

In December 2020, CMS confirmed that OMIDRIA qualifies for separate payment when used on Medicare Part B patients in the ASC setting under CMS’ policy for non-opioid pain management surgical drugs, effective retroactive as of October 1, 2020.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data