Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
OMEROS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(unaudited)
September 30,
December 31,
2022
2021
Assets
Current assets:
Cash and cash equivalents
$
145,533
$
100,808
Short-term investments
75,431
56,458
OMIDRIA contract royalty asset, short-term
47,744
44,319
Receivables, net
13,854
38,155
Prepaid expense and other assets
5,983
8,216
Total current assets
288,545
247,956
OMIDRIA contract royalty asset
143,641
140,251
Right of use assets
22,464
28,276
Property and equipment, net
1,847
1,731
Restricted investments
1,054
1,054
Total assets
$
457,551
$
419,268
Liabilities and shareholders’ equity (deficit)
Current liabilities:
Accounts payable
$
17,089
$
13,400
Accrued expenses
18,016
33,134
Current portion of lease liabilities
4,409
5,255
Total current liabilities
39,514
51,789
Unsecured convertible senior notes, net
314,819
313,458
OMIDRIA royalty obligation
125,000
—
Lease liabilities, non-current
23,533
29,126
Other accrued liabilities - noncurrent
999
1,115
Commitments and contingencies (Note 10)
Shareholders’ equity (deficit):
Preferred stock, par value $ 0.01 per share, 20,000,000 shares authorized; none issued and outstanding at September 30, 2022 and December 31, 2021.
—
—
Common stock, par value $ 0.01 per share, 150,000,000 shares authorized at September 30, 2022 and December 31, 2021; 62,730,015 and 62,628,855 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively.
627
626
Additional paid-in capital
717,509
706,288
Accumulated deficit
( 764,450 )
( 683,134 )
Total shareholders’ equity (deficit)
( 46,314 )
23,780
Total liabilities and shareholders’ equity (deficit)
$
457,551
$
419,268
See accompanying Notes to Condensed Consolidated Financial Statements
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OMEROS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
(unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Costs and expenses:
Research and development
$
38,568
$
25,818
$
86,172
$
88,448
Selling, general and administrative
12,198
14,010
37,079
42,280
Total costs and expenses
50,766
39,828
123,251
130,728
Loss from continuing operations
( 50,766 )
( 39,828 )
( 123,251 )
( 130,728 )
Interest expense
( 4,932 )
( 4,911 )
( 14,799 )
( 14,718 )
Interest and other income
906
461
2,069
1,212
Net loss from continuing operations
( 54,792 )
( 44,278 )
( 135,981 )
( 144,234 )
Net income from discontinued operations
37,336
21,575
54,665
57,848
Net loss
$
( 17,456 )
$
( 22,703 )
$
( 81,316 )
$
( 86,386 )
Basic and diluted net income (loss) per share:
Net loss from continuing operations
$
( 0.87 )
$
( 0.70 )
$
( 2.17 )
$
( 2.32 )
Net income from discontinued operations
0.59
0.34
0.87
0.93
Net loss
$
( 0.28 )
$
( 0.36 )
$
( 1.30 )
$
( 1.39 )
Weighted-average shares used to compute basic and diluted net income (loss) per share
62,730,015
62,510,727
62,728,276
62,267,557
See accompanying Notes to Condensed Consolidated Financial Statements
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OMEROS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share data)
(unaudited)
Additional
Common Stock
Paid-In
Accumulated
Shares
Amount
Capital
Deficit
Total
Balance at January 1, 2021
61,671,231
$
616
$
751,304
$
( 872,672 )
$
( 120,752 )
Exercise of stock options and warrants
580,781
6
6,327
—
6,333
At the market offering costs
—
—
( 241 )
—
( 241 )
Cumulative effect of adopting ASU 2020-06
—
—
( 70,779 )
( 4,697 )
( 75,476 )
Stock-based compensation expense
—
—
3,271
—
3,271
Net loss
—
—
—
( 35,090 )
( 35,090 )
Balance at March 31, 2021
62,252,012
622
689,882
( 912,459 )
( 221,955 )
Exercise of stock options
238,928
2
1,133
—
1,135
Stock-based compensation expense
—
—
3,117
—
3,117
Net loss
—
—
—
( 28,593 )
( 28,593 )
Balance June 30, 2021
62,490,940
624
694,132
( 941,052 )
( 246,296 )
Exercise of stock options
51,328
1
607
—
608
Stock-based compensation expense
—
—
5,694
—
5,694
Net loss
—
—
—
( 22,703 )
( 22,703 )
Balance September 30, 2021
62,542,268
$
625
$
700,433
$
( 963,755 )
$
( 262,697 )
Balance at January 1, 2022
62,628,855
$
626
$
706,288
$
( 683,134 )
$
23,780
Exercise of stock options
101,160
1
413
—
414
Stock-based compensation expense
—
—
3,892
—
3,892
Net loss
—
—
—
( 33,011 )
( 33,011 )
Balance at March 31, 2022
62,730,015
627
710,593
( 716,145 )
( 4,925 )
Stock-based compensation expense
—
—
3,072
—
3,072
Net loss
—
—
—
( 30,849 )
( 30,849 )
Balance June 30, 2022
62,730,015
627
713,665
( 746,994 )
( 32,702 )
Stock-based compensation expense
—
—
3,844
—
3,844
Net loss
—
—
—
( 17,456 )
( 17,456 )
Balance September 30, 2022
62,730,015
$
627
$
717,509
$
( 764,450 )
$
( 46,314 )
See accompanying Notes to Condensed Consolidated Financial Statements
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OMEROS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended September 30,
2022
2021
Operating activities:
Net loss
$
( 81,316 )
$
( 86,386 )
Adjustments to reconcile net loss to net cash used in operating activities:
Early termination of operating lease
( 454 )
—
Stock-based compensation expense
10,808
12,082
Non-cash interest expense
1,361
1,256
Depreciation and amortization
789
1,062
Changes in operating assets and liabilities:
Receivables
24,301
( 30,057 )
Prepaid expenses and other
1,769
5,740
OMIDRIA contract royalty asset
( 6,815 )
—
Accounts payable and accrued expense
( 11,544 )
4,796
Net cash used in operating activities
( 61,101 )
( 91,507 )
Investing activities:
Purchases of investments
( 103,573 )
( 5 )
Proceeds from the sale and maturities of investments
84,600
81,500
Purchases of property and equipment
( 100 )
( 203 )
Net cash provided by (used in) investing activities
( 19,073 )
81,292
Financing activities:
Proceeds from OMIDRIA liability for future royalties
125,000
—
Proceeds upon exercise of stock options and warrants
414
8,076
Payments on finance lease obligations
( 515 )
( 706 )
At the market offering costs
—
( 241 )
Net cash provided by financing activities
124,899
7,129
Net decrease in cash and cash equivalents
44,725
( 3,086 )
Cash and cash equivalents at beginning of period
100,808
10,501
Cash and cash equivalents at end of period
$
145,533
$
7,415
Supplemental cash flow information
Cash paid for interest
$
13,437
$
14,889
Property acquired under finance lease
$
806
$
139
See accompanying Notes to Condensed Consolidated Financial Statements
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OMEROS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1—Organization and Basis of Presentation
General
Omeros Corporation (“Omeros,” the “Company” or “we”) is a clinical-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting immunologic diseases, including complement-mediated diseases and cancers related to dysfunction of the immune system, as well as addictive and compulsive disorders. We marketed our first drug product, OMIDRIA ® (phenylephrine and ketorolac intraocular solution) 1% / 0.3% for use during cataract surgery or intraocular lens replacement in the United States (the “U.S.”) until we sold OMIDRIA and related business assets on December 23, 2021 (see “Sale of OMIDRIA Assets” below for additional information).
Our drug candidate narsoplimab, targeting mannan-binding lectin-associated serine protease-2 (“MASP-2”) and the lectin pathway of complement, is the subject of a biologics license application (“BLA”) pending before the U.S. Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). On October 18, 2021, we announced the receipt of a Complete Response Letter (“CRL”) from FDA indicating that the BLA could not be approved as submitted. In November 2022, we received the decision by FDA’s Office of New Drugs (“OND”) denying our appeal of the CRL. Although our appeal was denied, the decision proposes a path forward for resubmission of the BLA based on survival data from the completed pivotal trial versus a historical control group, with or without an independent literature analysis.
Clinical development of narsoplimab also includes programs focused on complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19. Our pipeline of investigational agents also includes: our long-acting MASP-2 inhibitor OMS1029, which is currently in a Phase 1 clinical trial, and OMS906, our inhibitor of mannan-binding lectin-associated serine protease 3 (“MASP-3”) targeting the alternative pathway of complement, which has completed a Phase 1 clinical trial and is being advanced into clinical programs for paroxysmal nocturnal hemoglobinuria (“PNH”) and complement 3 (“C3”) glomerulopathy.
Basis of Presentation
Our condensed consolidated financial statements include the financial position and results of operations of Omeros and our wholly owned subsidiaries. All inter-company transactions have been eliminated. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain prior year amounts in the condensed consolidated balance sheets, statements of operations, statements of stockholders’ equity (deficit) and statements of cash flows and the notes to the condensed consolidated financial statements have been reclassified in the condensed consolidated financial statements to conform to the current year presentation.
Sale of OMIDRIA Assets
On December 23, 2021, we completed the sale of OMIDRIA and certain related assets and liabilities to Rayner Surgical Inc. (“Rayner”) pursuant to an Asset Purchase Agreement dated December 1, 2021 (the “Asset Purchase Agreement”). We received a payment of $ 126.0 million at closing and receive royalty payments on worldwide sales of OMIDRIA and potentially a $ 200.0 million milestone payment if separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years before January 1, 2025.
As a result of the divestiture, the results of OMIDRIA operations (e.g., revenues and operating costs) are included in discontinued operations in our condensed consolidated statements of operations and comprehensive loss for all periods presented (see “Note 3 – Discontinued Operations”).
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Risks and Uncertainties
As of September 30, 2022, we had cash, cash equivalents and short-term investments of $ 221.0 million and outstanding accounts receivable of $ 13.9 million. Our loss for the quarter ended September 30, 2022 was $ 17.5 million. Included in our loss for the quarter was a $ 29.0 million noncash benefit related to the revaluation of our OMIDRIA contract royalty asset, which was partially offset by $ 4.6 million of noncash operating expenses. Our loss for the nine months ended September 30, 2022 was $ 81.3 million and included $ 30.5 million of noncash benefit related to the revaluation of our OMIDRIA contract royalty asset along with differences between actual and estimated royalties in the third quarter, which was partially offset by $ 12.5 million of noncash operating expenses.
We plan to continue to fund our operations for the next twelve months with our existing cash and investments, our current accounts receivable, and our portion of OMIDRIA royalties. There is also the potential for us to receive a $ 200.0 million milestone related to achievement of long-term OMIDRIA separate payment if, prior to January 1, 2025, separate payment for OMIDRIA is secured under Medicare Part B for at least four continuous years. If FDA approval is granted for narsoplimab for HSCT-TMA, we expect that sales of narsoplimab will also provide funds for our operations . We have a sales agreement through which we may, from time to time, offer and sell shares of our common stock in an “at the market” equity offering for aggregate sales proceeds of up to $ 150.0 million. Should it be determined to be strategically advantageous, we could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology.
Management believes the assets on hand along with our portion of expected OMIDRIA royalties to be received are adequate to finance our operations at least through November 9, 2023. Accordingly, the accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant items subject to such estimates include OMIDRIA contract royalty asset valuation, stock-based compensation expense, and accruals for clinical trials and manufacturing of drug product. We base our estimates on historical experience and on various other factors, including the impact of the COVID-19 pandemic, that we believe are reasonable under the circumstances; however, actual results could differ from these estimates.
Note 2—Significant Accounting Policies
Discontinued Operations
We review the presentation of planned or completed business dispositions in the condensed consolidated financial statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business and, if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results.
Planned or completed business dispositions are presented as discontinued operations when all the criteria described above are met. For those divestitures that qualify as discontinued operations, all comparative periods presented are reclassified in the consolidated balance sheets. Additionally, the results of operations of a discontinued operation are reclassified to income from discontinued operations, for all periods presented in the condensed consolidated statements of operations and comprehensive loss. Results of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations. The OMIDRIA assets sold to Rayner qualify as a discontinued operation (see “Note 3 – Discontinued Operations”).
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OMIDRIA Royalties and OMIDRIA Contract Royalty Assets
We have rights to receive future royalties from Rayner on OMIDRIA net sales at rates that vary based on geography and certain regulatory contingencies. Therefore, future OMIDRIA royalties are treated as variable consideration. The sale of OMIDRIA qualified as an asset sale under GAAP. To measure the OMIDRIA contract royalty asset, we used the expected value approach, which is the sum of the discounted probability-weighted royalty payments, net of tax, we would receive using a range of potential outcomes, to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Accordingly, the contract royalty asset excludes the achievement of the potential $ 200.0 million milestone payment and any non-U.S. royalties to the extent it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Royalties earned are primarily recorded as a reduction to the OMIDRIA contract royalty asset. The amounts recorded in discontinued operations will reflect interest earned on the outstanding OMIDRIA contract royalty asset and any amounts received that are different from the expected royalties recorded at closing. The OMIDRIA contract royalty asset is re-measured periodically using the expected value approach based on actual results and future expectations. Any required adjustment to the OMIDRIA contract royalty asset will be recorded into discontinued operations.
OMIDRIA Royalty Obligation
On September 30, 2022, we sold to DRI Healthcare Acquisitions LP (“DRI”) an interest in a portion of our future OMIDRIA royalty receipts for a purchase price of $ 125.0 million in cash (see “Note 8 – OMIDRIA Royalty Obligation”).
The $ 125.0 million cash consideration obtained is classified as liability and is recorded as an “OMIDRIA royalty obligation” on our condensed consolidated balance sheet. The liability is being amortized over the term of the arrangement using the implied effective interest rate of 9.4 % and interest expense is recorded as a component of continuing operations.
To the extent our estimates of future royalties are greater or less than previous estimates, we will adjust the carrying amount of the liability for future OMIDRIA royalties to the present value of the revised estimated cash flows, discounted at the original effective interest rate utilizing the cumulative catch-up method. The offset to the adjustment would be recognized as a component of net income (loss) from continuing operations.
OMIDRIA Revenue Recognition
Prior to the sale of OMIDRIA on December 23, 2021, when we entered into a customer contract, we performed the following five steps: (i) identified the contract with a customer; (ii) identified the performance obligations in the contract; (iii) determined the transaction price; (iv) allocated the transaction price to the performance obligations in the contract; and (v) recognized revenue when (or as) we satisfy a performance obligation.
We generally recorded OMIDRIA product sales when the product was delivered to our wholesalers. OMIDRIA product sales were recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts. Accruals or allowances were established for these deductions in the same period when revenue was recognized, and actual amounts incurred were offset against the applicable accruals or allowances. We reflected each of these accruals or allowances as either a reduction in the related accounts receivable or as an accrued liability, depending on how the amount is expected to be settled.
Inventory
We expense inventory costs related to product candidates as research and development expenses until regulatory approval is reasonably assured in the U.S. or the European Union (the “EU”). Once approval is reasonably assured, costs, including amounts related to third-party manufacturing, transportation and internal labor and overhead, will be capitalized.
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Right of Use Assets and Related Lease Liabilities
We record operating leases as right-of-use assets and recognize the related lease liabilities equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available. We recognize variable lease payments, when incurred. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.
We record finance leases as a component of property and equipment and amortize these assets within operating expenses on a straight-line basis to their residual values over the shorter of the term of the underlying lease or the estimated useful life of the equipment. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.
We account for leases with initial terms of 12 months or less as operating expenses on a straight-line basis over the lease term .
Stock-Based Compensation
Stock-based compensation expense is recognized for all share-based payments, including grants of stock option awards and restricted stock unit awards (“RSU”), based on estimated fair values. The fair value of our stock options is calculated using the Black-Scholes option-pricing model which requires judgmental assumptions around volatility, forfeiture rates and expected option term. Compensation expense is recognized over the optionees’ requisite service periods, which is generally the vesting period, using the straight-line method. Forfeiture expense is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained upon an examination. A valuation allowance is established when it is more likely than not that the deferred tax assets will not be realized.
Note 3—Discontinued Operations
On December 23, 2021, we completed the sale of OMIDRIA and certain related assets, including inventory and prepaid expenses. We retained the outstanding accounts receivable and all outstanding liabilities related to OMIDRIA as of the closing date.
Upon closing, we received an up-front cash payment of $ 126.0 million. We receive a 50 % royalty on OMIDRIA net sales in the U.S. until the earlier of January 1, 2025 or the payment of the $ 200.0 million milestone described below. After such date, we will receive a 30 % royalty on OMIDRIA net sales in the U.S. (the “U.S. base royalty rate”) until the expiration or termination of the last issued and unexpired U.S. patent. The U.S. base royalty rate is reduced to 10 % upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment. We will also receive a royalty of 15 % on OMIDRIA net sales outside the U.S. on a country-by-country basis until the expiration or termination of the last issued and unexpired OMIDRIA patent in such country. We will receive a $ 200.0 million milestone payment if, prior to January 1, 2025, separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years .
During the three and nine months ended September 30, 2022, we earned royalties of $ 16.5 million and $ 47.6 million, respectively, on sales of OMIDRIA which we recorded as a reduction from the OMIDRIA contract royalty asset. During the three and nine months ended September 30, 2022, we also recorded $ 37.3 million and $ 54.7 million, respectively, of
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income in discontinued operations representing interest income and remeasurement adjustments to the OMIDRIA contract royalty asset. The following schedule presents a rollforward of the OMIDRIA contract royalty asset (in thousands):
OMIDRIA contract royalty asset at December 31, 2021
$
184,570
Royalties earned
( 47,555 )
Royalty interest income and other
23,857
Remeasurement adjustments
30,513
OMIDRIA contract royalty asset at September 30, 2022
$
191,385
Net income from discontinued operations is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Product sales, net
$
—
$
30,004
$
—
$
79,888
Royalty interest income and other
8,229
—
23,857
—
Remeasurement adjustments
29,043
—
30,513
—
Other income (expenses), net
64
( 8,429 )
295
( 22,040 )
Net income from discontinued operations
$
37,336
$
21,575
$
54,665
$
57,848
Cash flow from discontinued operations is as follows:
Nine Months Ended
September 30,
2022
2021
(In thousands)
Total operating inflows (outflows) from discontinued operations
$
12,037
$
( 23,828 )
Note 4—Net Loss Per Share
Our potentially dilutive securities include potential common shares related to our stock options, warrants, RSUs and unsecured convertible senior notes. Diluted earnings per share (“Diluted EPS”) considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted EPS excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period.
Potentially dilutive securities excluded from Diluted EPS are as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
2023 Notes convertible to common stock (1)
4,941,739
4,941,739
4,941,739
4,941,739
Outstanding options to purchase common stock
19,292
1,781,619
8,246
2,504,901
Outstanding restricted stock units
201,467
—
208,962
—
Total potentially dilutive shares excluded from net loss per share
5,162,498
6,723,358
5,158,947
7,446,640
(1) The 2023 Notes (defined below) are subject to a capped call arrangement that potentially reduces the dilutive effect as described in “Note 7 — Unsecured Convertible Senior Notes.” Any potential impact of the capped call arrangement is excluded from this table.
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Note 5—Certain Balance Sheet Accounts
OMIDRIA Contract Royalty Asset
The OMIDRIA contract royalty asset consists of the following:
September 30,
December 31,
2022
2021
(In thousands)
Short-term contract royalty asset
$
47,744
$
44,319
Long-term contract royalty asset
143,641
140,251
Total OMIDRIA contract royalty asset
$
191,385
$
184,570
Receivables, net
Receivables, net consists of the following:
September 30,
December 31,
2022
2021
(In thousands)
Royalty and trade receivables, net
$
13,113
$
36,505
Sublease and other receivables
741
1,650
Total receivables, net
$
13,854
$
38,155
Trade receivables are net of product return and chargeback allowances. Product returns and chargeback allowances were $ 2.0 million as of December 31, 2021.
Property and Equipment, Net
Property and equipment, net consists of the following:
September 30,
December 31,
2022
2021
(In thousands)
Finance leases
$
6,785
$
5,979
Laboratory equipment
3,121
3,091
Computer equipment
1,076
1,069
Office equipment and furniture
625
625
Total cost
11,607
10,764
Less accumulated depreciation and amortization
( 9,760 )
( 9,033 )
Total property and equipment, net
$
1,847
$
1,731
For each of the three months ended September 30, 2022 and September 30, 2021, depreciation and amortization expense was $ 0.3 million. For the nine months ended September 30, 2022 and September 30, 2021, depreciation and amortization expense was $ 0.8 million and $ 1.1 million, respectively.
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Accrued Expenses
Accrued expenses consists of the following:
September 30,
December 31,
2022
2021
(In thousands)
Clinical trials
$
4,958
$
2,430
Interest payable
3,703
5,172
Employee compensation
3,704
3,706
Contract research and development
2,639
3,916
Consulting and professional fees
2,338
7,455
Sales rebates, fees and discounts
—
8,442
Other accrued expenses
674
2,013
Total accrued expenses
$
18,016
$
33,134
Note 6—Fair-Value Measurements
As of September 30, 2022, and December 31, 2021, all investments were classified as short-term and available-for-sale on the accompanying condensed consolidated balance sheets. Investment income, which was included as a component of other income, consists of interest earned.
On a recurring basis, we measure certain financial assets at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:
Level 1—Observable inputs for identical assets or liabilities, such as quoted prices in active markets;
Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3—Unobservable inputs in which little or no market data exists, therefore they are developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis are as follows:
September 30, 2022
Level 1
Level 2
Level 3
Total
(In thousands)
Assets:
Money-market funds classified as short-term investments
$
75,431
$
—
$
—
$
75,431
Money-market funds classified as non-current restricted investments
1,054
—
—
1,054
Total
$
76,485
$
—
$
—
$
76,485
December 31, 2021
Level 1
Level 2
Level 3
Total
(In thousands)
Assets:
Money-market funds classified as short-term investments
$
56,458
$
—
$
—
$
56,458
Money-market funds classified as non-current restricted investments
1,054
—
—
1,054
Total
$
57,512
$
—
$
—
$
57,512
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Cash held in demand deposit accounts of $ 145.5 million and $ 100.8 million is excluded from our fair-value hierarchy disclosure as of September 30, 2022 and December 31, 2021, respectively. There were no unrealized gains or losses associated with our investments as of September 30, 2022 or December 31, 2021. The carrying amounts reported in the accompanying condensed consolidated balance sheets for receivables, accounts payable, other current monetary assets and liabilities approximate fair value.
See “Note 7—Unsecured Convertible Senior Notes” for the carrying amount and estimated fair value of our outstanding convertible senior notes.
Note 7—Unsecured Convertible Senior Notes
In November 2018, we issued $ 210.0 million in aggregate principal amount of our 6.25 % Convertible Senior Notes (the “2023 Notes” ) , and in August and September 2020, we issued $ 225.0 million in aggregate principal amount of our 5.25 % Convertible Senior Notes (the “2026 Notes”). We used a portion of the proceeds from the 2026 Notes to repurchase $ 115.0 million principal amount of the 2023 Notes and terminate a corresponding portion of the related capped call for the 2023 Notes, as described below.
Unsecured convertible senior notes outstanding at September 30, 2022 and December 31, 2021 are as follows:
Balance as of September 30, 2022
2023 Notes
2026 Notes
Total
(In thousands)
Principal amount
$
95,000
$
225,030
$
320,030
Unamortized debt issuance costs
( 789 )
( 4,422 )
( 5,211 )
Total unsecured convertible senior notes, net
$
94,211
$
220,608
$
314,819
Fair value of outstanding unsecured convertible senior notes (1)
$
88,113
$
132,543
Balance as of December 31, 2021
2023 Notes
2026 Notes
Total
(In thousands)
Principal amount
$
95,000
$
225,030
$
320,030
Unamortized discount
( 1,282 )
( 5,290 )
( 6,572 )
Total unsecured convertible senior notes, net
$
93,718
$
219,740
$
313,458
Fair value of outstanding unsecured convertible senior notes (1)
$
87,163
$
171,867
(1) The fair value is classified as Level 3 due to the limited trading activity for the unsecured convertible senior notes.
2023 Unsecured Convertible Senior Notes
Our 2023 Notes are unsecured and accrue interest at an annual rate of 6.25 % per annum, payable semi-annually in arrears on May 15 and November 15 of each year. The 2023 Notes mature on November 15, 2023 unless earlier purchased, redeemed or converted in accordance with their terms.
As of September 30, 2022, the unamortized debt issuance costs of $ 0.8 million will be amortized to interest expense at an effective interest rate of 7.0 % over the remaining term.
Subject to the satisfaction of certain conditions, the 2023 Notes are convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 52.0183 shares of our common stock per $ 1,000 of note principal (equivalent to an initial conversion price of approximately $ 19.22 per share
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of common stock), which equals approximately 4.9 million shares of common stock issuable upon conversion, subject to adjustment in certain circumstances.
To reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2023 Notes, we entered into a capped call transaction (the “2023 Capped Call”), which covers the number of shares of our common stock underlying the 2023 Notes when our common stock share price is trading between the initial conversion price of $ 19.22 and $ 28.84 . In connection with the partial repurchase of the 2023 Notes, we entered into a capped call termination contract to unwind a proportionate amount of the 2023 Capped Call. As of September 30, 2022, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.
The following table sets forth total interest expense recognized in connection with the 2023 Notes:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
(In thousands)
Contractual interest expense
$
1,484
$
1,484
$
4,453
$
4,453
Amortization of debt issuance costs
167
156
493
459
Total
$
1,651
$
1,640
$
4,946
$
4,912
2026 Unsecured Convertible Senior Notes
Our 2026 Notes are unsecured and accrue interest at an annual rate of 5.25 % per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The 2026 Notes mature on February 15, 2026, unless earlier purchased, redeemed or converted in accordance with their terms.
As of September 30, 2022, the unamortized debt issuance costs of $ 4.4 million will be amortized to interest expense at an effective interest rate of 5.9 % over the remaining term.
Subject to the satisfaction of certain conditions, the 2026 Notes are convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 54.0906 shares of our common stock per $ 1,000 of note principal (equivalent to an initial conversion price of approximately $ 18.4875 per share of common stock), which equals approximately 12.2 million shares of common stock issuable upon conversion, subject to adjustment in certain circumstances.
To reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2026 Notes, we entered into capped call transactions (the “2026 Capped Calls”), which cover the number of shares of our common stock underlying the 2026 Notes when our common stock share price is trading between the initial conversion price of $ 18.49 and $ 26.10 . However, should the market price of our common stock exceed the $ 26.10 cap, then the conversion of the 2026 Notes would have a dilutive impact or may require a cash expenditure to the extent the market price exceeds the cap price.
The following table sets forth interest expense recognized related to the 2026 Notes:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
(In thousands)
Contractual interest expense
$
2,954
$
2,954
$
8,861
$
8,861
Amortization of debt issuance costs
294
277
869
797
Total
$
3,248
$
3,231
$
9,730
$
9,658
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Future Minimum Principal Payments
Future minimum principal payments for the 2023 Notes and 2026 Notes as of September 30, 2022 are as follows:
(In thousands)
2023
$
95,000
2024
—
2025
—
2026
225,030
2027
—
Total future minimum principal payments under the 2023 Notes and 2026 Notes
$
320,030
Note 8—OMIDRIA Royalty Obligation
On September 30, 2022, we sold to DRI an interest in our future OMIDRIA royalty receipts and received $ 125.0 million in cash consideration. DRI is entitled to receive royalties on OMIDRIA net sales between September 1, 2022 and December 31, 2030, subject to annual caps. DRI receives their prorated monthly cap amount before we receive any royalty proceeds. DRI is not entitled to carry-forward nor recoup any shortfall if the royalties paid by Rayner for an annual period are less than the cap amount applicable to each discrete calendar year. Additionally, DRI has no recourse to or security interest in our assets other than our OMIDRIA royalty receipts, and we retain all royalty receipts in excess of the respective cap in any given calendar year. The maximum payout DRI is entitled to receive is $ 188.4 million which, if fully paid, would be an effective interest rate of 9.4 %.
The annual caps are as follows:
● $ 1.7 million for the remainder of calendar year 2022
● $ 13.0 million for calendar year 2023
● $ 20.0 million for calendar year 2024
● $ 25.0 million for calendar years 2025 through 2028
● $ 26.3 million for calendar year 2029
● $ 27.5 million for calendar year 2030
The OMIDRIA royalty obligation is classified as a Level 3 liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market. As of September 30, 2022, the carrying value approximates its estimated fair value.
Note 9—Leases
We have an operating lease for our office and laboratory facilities with an initial term that ends in November 2027 and two options to extend the lease term by five years each. On January 14, 2022, we entered into an agreement with our landlord to early terminate a portion of the rentable square footage of our office and laboratory facilities, which reduced the right of use asset by $ 4.7 million and related liability by $ 5.2 million. We recorded a non-cash gain of $ 0.5 million upon early termination of this portion of the lease. In addition, we carry various finance leases for laboratory equipment.
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Supplemental lease information is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
(In thousands)
Lease cost
Operating lease cost
$
1,659
$
1,961
$
4,529
$
5,528
Finance lease cost:
Amortization
250
243
570
854
Interest
32
40
123
127
Variable lease cost
813
863
2,395
2,667
Sublease income
( 432 )
( 447 )
( 1,377 )
( 1,288 )
Net lease cost
$
2,322
$
2,660
$
6,240
$
7,888
Cash paid for amounts included in the measurement of lease liabilities is as follows:
Nine Months Ended
September 30,
2022
2021
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities
Cash payments for operating leases
$
5,312
$
5,521
Cash payments for financing leases
$
598
$
684
Note 10—Commitments and Contingencies
Contracts
We have various agreements with third parties that collectively require payment of termination fees totaling $ 20.6 million as of September 30, 2022 if we cancel the work within specific time frames, either prior to commencing or during performance of the contracted services .
Development Milestones and Product Royalties
We have licensed a variety of intellectual property from third parties that we are currently developing or may develop in the future. These licenses may require milestone payments during the clinical development processes or upon approval of commercial sale as well as low single- to low double-digit royalties on the net income or net sales of the product. For the three months and nine months ended September 30, 2022 and September 30, 2021, development milestone expenses were insignificant. Should narsoplimab be approved, we would owe milestone payments to development partners and be obligated to pay low single-digit royalties on net sales of the product.
Note 11—Shareholders’ Deficit
Common Stock and Warrants
On March 1, 2021, we entered into a sales agreement to sell shares of our common stock having an aggregate offering price of up to $ 150.0 million, from time to time, through an “at the market” equity offering program. As of September 30, 2022, we have not sold any shares under this program.
In March 2021, a cashless exercise was executed for 43,115 warrants, resulting in the issuance of 24,901 shares of our common stock. As of September 30, 2022, warrants to purchase 200,000 shares of our common stock remained outstanding with an exercise price of $ 23.00 per share. The warrants expire on April 12, 2023.
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Note 12—Stock-Based Compensation
Our stock option plans provide for the grant of incentive and non-qualified stock options, restricted stock awards, RSUs, warrants and other stock awards to employees, non-employee directors and consultants.
Stock-based compensation is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Continuing operations
Research and development
$
1,672
$
2,444
$
4,777
$
5,284
Selling, general and administrative
2,200
2,906
6,170
6,038
Total stock-based compensation in continuing operations
3,872
5,350
10,947
11,322
Discontinued operations
( 28 )
344
( 139 )
760
Total stock-based compensation
$
3,844
$
5,694
$
10,808
$
12,082
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were applied to all stock option grants:
Three Months Ended
Nine Months Ended
September 30, 2022
September 30, 2022
Estimated weighted-average fair value
$
2.97
$
2.93
Weighted-average assumptions:
Expected volatility
89
%
88
%
Expected life, in years
6.0
6.0
Risk-free interest rate
2.83
%
2.81
%
Expected dividend yield
—
%
—
%
Stock option activity for all stock plans and related information is as follows:
Weighted-
Average
Aggregate
Exercise
Remaining
Intrinsic
Options
Price per
Contractual Life
Value
Outstanding
Share
(In years)
(In thousands)
Balance at December 31, 2021
12,709,887
$
12.61
Granted
2,631,334
3.96
Exercised
( 101,160 )
4.10
Forfeited
( 574,203 )
13.58
Balance at September 30, 2022
14,665,858
$
11.08
5.7
$
78
Vested and expected to vest at September 30, 2022
14,202,672
$
11.16
5.6
$
70
Exercisable at September 30, 2022
10,277,595
$
12.11
4.2
$
—
As of September 30, 2022, there were 4.4 million unvested options outstanding that will vest over a weighted-average period of 2.4 years. The total estimated compensation expense yet to be recognized on outstanding options is $ 22.6 million.
The Company has 200,000 unvested RSUs outstanding as of September 30, 2022 that vest 50 % on December 1, 2022 and 50 % on December 1, 2023.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.