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Item 8. Financial Statements and Supplementary Data

2023-03-13 compared with 2022-03-01 · 260 added, 285 removed, 502 unchanged (52% of the section changed)

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Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statements of Operations and Comprehensive Income (Loss )

Consolidated Statement of Shareholders’ Equity (Deficit)

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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, 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”).

We have audited the accompanying consolidated balance sheets of Omeros Corporation (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S.

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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

Description of the Matter

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

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.

Auditing management’s determination of the revenue deductions is complex and requires judgment due to the level of estimation involved in management’s assumptions related to inventories held by wholesalers and ASCs, and the experience ratio used to estimate unsubmitted claims.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over management’s process for estimating inventories in channel and the experience ratio.

To test the revenue deductions, we performed audit procedures that included, among others, evaluating the significant assumptions and the accuracy and completeness of underlying data used in management’s calculations.

We compared the significant assumptions used by management to historical ratios of rebate claims to product sales, and other relevant factors.

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

The critical audit matter communicated below is a matter arising from the current period audit of the 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 financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.

OMIDRIA Contract Royalty Asset

Description of the Matter

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.

As more fully described in Note 2 of the financial statements, the Company recorded a contract royalty 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.

To measure that contract royalty asset, the Company used the expected value approach, which is the discounted 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.

in various scenarios and the probability-weighting of those scenarios, 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 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.

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, and (2) management’s relative weighting of those scenarios.

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

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

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Prepaid expense and other assets

Current assets from discontinued operations

Total current assets

OMIDRIA contract royalty asset

Property and equipment, net

Right of use assets

Property and equipment, net

Restricted investments

Advanced payments, non-current

Liabilities and shareholders’ equity (deficit)

Liabilities and shareholders’ equity

Current liabilities:

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Accrued expenses

Current portion of unsecured convertible senior notes, net

Current portion of OMIDRIA royalty obligation

Current portion of lease liabilities

Total current liabilities

Lease liabilities, non-current

Unsecured convertible senior notes, net

OMIDRIA royalty obligation

Lease liabilities, non-current

Other accrued liabilities - noncurrent

Commitments and contingencies (Note 11)

Shareholders’ equity (deficit):

Shareholders’ equity:

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

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Accumulated deficit

Total shareholders’ equity (deficit)

Total liabilities and shareholders’ equity (deficit)

Total shareholders’ equity

Total liabilities and shareholders’ equity

See accompanying Notes to Consolidated Financial Statements

OMEROS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share data)

Year Ended December 31,

Product sales, net

Costs and expenses:

Cost of product sales

Research and development

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Total costs and expenses

Loss from continuing operations

Loss from operations

Loss on early extinguishment of debt

Interest expense

Interest and other income

Loss from continuing operations before income tax benefit

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Issuance of common stock upon exercise of stock options

Stock-based compensation

Balance at December 31, 2019

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

Issuance of common stock upon exercise of stock options

Issuance of common stock upon grant of restricted stock awards

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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 exercise of stock options

Issuance of common stock upon grant of restricted stock awards

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Balance at December 31, 2021

Issuance of common stock upon exercise of stock options

Issuance of common stock upon vesting of restricted stock units

Stock-based compensation

Balance at December 31, 2022

See accompanying Notes to Consolidated Financial Statements

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Net income (loss)

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

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Stock-based compensation expense

Gain on the sale of OMIDRIA, gross

Non-cash interest expense

Gain on sale of OMIDRIA, gross

Non-cash interest expense on unsecured convertible debt

Non-cash interest expense on future royalty obligation

Depreciation and amortization

Noncash adjustments on buyout of equipment finance leases

Remeasurement on OMIDRIA contract royalty asset

Interest on OMIDRIA contract royalty asset

Early termination of operating lease

Loss on early extinguishment of debt

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Changes in operating assets and liabilities:

Prepaid expenses and other assets

Accounts payable and other expense

Other liabilities non-current

Prepaid expenses and other

OMIDRIA contract royalty asset

Accounts payable and accrued expense

Net cash used in operating activities

Investing activities:

Cash proceeds for the sale of OMIDRIA

Purchases of property and equipment

Cash proceeds on sale of OMIDRIA

Purchases of investments

Proceeds from the sale and maturities of investments

Purchases of property and equipment

Net cash provided by (used in) investing activities

Financing activities:

Proceeds from issuance of convertible senior notes

Proceeds upon entering into OMIDRIA royalty obligation

Principal payments on OMIDRIA royalty obligations

Proceeds from issuance of convertible debt

Payments for debt issuance costs

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Proceeds upon exercise of stock options and warrants

At the market offering costs

Payments on finance lease obligations

At the market offering costs

Net cash provided by financing activities

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Cash paid for interest

Property acquired under finance lease

Equipment acquired under finance lease

See accompanying Notes to Consolidated Financial Statements

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Note 1—Organization and Basis of Presentation

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.

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 disorders including complement-mediated diseases, cancers, and 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).

The lead drug candidate in our pipeline of complement-targeted therapeutics is narsoplimab, a proprietary, patented human monoclonal antibody targeting mannan-binding lectin-associated serine protease 2 (“MASP-2”), the key activator of the lectin pathway of complement.

Clinical development of narsoplimab is currently focused primarily on hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”) and immunoglobulin A (“IgA”) nephropathy.

Our pipeline of clinical-stage investigational agents also includes:

our long-acting MASP-2 inhibitor, OMS1029, our inhibitor of mannan-binding lectin-associated serine protease-3 (“MASP-3”), OMS906, and our phophodiesterase 7 (“PDE7”) inhibitor, OMS527.

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

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”).

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

In December 2022, the milestone event occurred and we recorded a $ 200.0 million milestone receivable.

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

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 income (loss) and excluded from continuing operations for all periods presented (See “Note 3 – Discontinued Operations”).

Basis of Presentation

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generally accepted accounting principles (“GAAP”).

Certain prior year amounts in the balance sheet, statement of cash flows and the footnotes have been reclassified in the consolidated financial statements to conform to the current year presentation.

Risks and Uncertainties

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 .

Liquidity and Capital Resources

As of December 31, 2022, we had cash, cash equivalents and short-term investments of $ 194.9 million and outstanding accounts receivable of $ 213.2 million, substantially all of which have since been collected subsequent to year end .

Our cash used in operations was $ 86.5 million and our net income for the year ended December 31, 2022 was $ 47.4 million, which included the $ 200.0 million Milestone Payment.

In addition, the principal balance of $ 95.0 million outstanding on our 2023 convertible senior notes becomes due in November 2023.

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

We have not yet established an ongoing source of revenue sufficient to cover our operating costs and, therefore, could need to raise additional capital to accomplish our business plan and to retire our outstanding convertible senior notes due in 2026.

We plan to continue to fund our operations for at least the next twelve months with our existing cash and investments and our accounts receivable.

If FDA approval is granted for HSCT-TMA within the next twelve months, sales of narsoplimab may 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.

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 has had 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 the continued impact on our business, operations or financial results;

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

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, 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;

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 that we believe are reasonable under the circumstances;

however, actual results could differ from these estimates.

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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.

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 income (loss).

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

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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.

OMIDRIA Royalties, Milestones and Contract Royalty Assets

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

Therefore, future OMIDRIA royalties are treated as variable consideration.

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.

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, 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.

As contemplated by the Asset Purchase Agreement, the royalty rate applicable to U.S.

net sales of OMIDRIA was reduced from 50 % to 30 % upon the occurrence, in December 2022, of the event triggering the $ 200.0 million Milestone Payment.

Consequently, we revalued the OMIDRIA contract royalty asset using the 30 % royalty rate on U.S.

net sales and adjusted the probability weighted outcomes to reflect the occurrence of the milestone event.

Royalties earned are 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 at 11.0 % and any amounts we receive that are different from the expected royalties.

The OMIDRIA contract royalty asset will be re-measured periodically using the expected value approach based on actual results and future expectations.

Any required adjustment to the OMIDRIA contract royalty asset will be recorded in discontinued operations.

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 9 - OMIDRIA Royalty Obligation”).

The $ 125.0 million cash consideration was recorded as an “OMIDRIA royalty obligation” on our consolidated balance sheet.

The liability is amortized over the term of the arrangement using the implied effective interest rate of 9.4 %.

Interest expense is recorded as a component of continuing operations.

To the extent our estimates of future royalties are less than previous estimates, we will adjust the carrying amount of the OMIDRIA royalty obligation to the present value of the revised estimated cash flows, discounted at the 9.4 % original effective interest rate utilizing the cumulative catch-up method.

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

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

Cash and cash equivalents include highly liquid investments with a maturity of three months or less on the date of purchase.

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’ equity.

Cash and cash equivalents include highly liquid investments with a maturity of three months or less on the date of purchase which can be easily converted into cash without a significant impact to their value.

Short-term investment securities are classified as held-to-maturity or available-for-sale.

Investments classified as held-to-maturity are carried at cost.

Investments classified as available-for-sale are carried at fair value.

Unrealized gains and losses on investments classified as available-for-sale 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.

The cost of securities sold is based on the specific-identification method.

Investments in securities with maturities of less than one year, or those for which management intends to use the investments to fund current operations, are included in current assets.

Investments with maturities of less than one year, or those for which management intends to use the investments to fund current operations, are included in current assets.

We evaluate whether an investment is other-than-temporarily impaired based on the specific facts and circumstances.

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Restricted investments held in money-market funds include security deposits held by our landlord.

As of December 31, 2021 and 2020, all investments are classified as short-term and available-for-sale.

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

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

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

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

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 (“EU”).

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.

Once approval is reasonably assured, costs, including amounts related to third-party manufacturing, transportation and internal labor and overhead, will be capitalized.

Receivables, Net

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.

Receivables at December 31, 2022 primarily consisted of the $ 200.0 million milestone and royalties receivable from Rayner.

Receivables at December 31, 2021 were primarily OMIDRIA customer receivables made prior to the sale to Rayner and collected after the closing.

Considering the nature of our receivables, we concluded an allowance for doubtful accounts was not necessary as of December 31, 2022 and 2021.

Property and Equipment, Net

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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.

ASU 2020- 06 removed 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.

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and (v) recognize revenue when (or as) we satisfy a performance obligation.

Product Sales, Net

We generally record revenue from product sales when the product is delivered to our wholesalers and title for the product is transferred.

Product sales are recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts.

Accruals or allowances are established for these deductions in the same period when revenue is recognized, and actual amounts incurred are offset against the applicable accruals or allowances.

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

Chargebacks and Rebates

Provisions for chargebacks are determined utilizing historical and projected payer mix and information regarding sell-through and inventory on-hand received directly from wholesalers.

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 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.

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.

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

We allow for the return of product up to 12 months past its expiration date or for product that is damaged.

In estimating product returns, we take into consideration our return experience to date, the remaining shelf-life of product we have previously sold, inventory in the wholesale channel and our expectation that product is typically not held by the health care providers based on the frequency of their reorders.

Research and Development

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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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Advertising costs, which we consider to be media and marketing materials, are expensed as incurred and were $ 3.2 million, $ 7.8 million and $ 5.6 million during the years ended December 31, 2022, 2021 and 2020, respectively.

Of these amounts, advertising costs related to the discontinued operations of OMIDRIA were $ 2.0 million and $ 1.1 million in 2021 and 2020, respectively.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases.

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Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments 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.

Stock-based compensation expense is recognized for all share-based payments, including grants of stock option awards and restricted stock units (“RSU”) based on estimated fair values.

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

Compensation expense is recognized over the 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.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is comprised of net loss and certain changes in equity that are excluded from net loss.

There was no difference between comprehensive loss and net loss for the years ended December 31, 2021, 2020 or 2019.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is comprised of net income (loss) and certain changes in equity that are excluded from net income (loss).

There was no difference between comprehensive income (loss) and net income (loss) for the years ended December 31, 2022, 2021 or 2020.

Financial Instruments and Concentrations of Credit Risk

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At times, our cash and cash equivalents balance held at a financial institution may exceeds the federally insured limits.

To limit the credit risk, we invest our excess cash in high-quality securities such as money market mutual funds, certificates of deposit and commercial paper.

Major Customers

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

Distributor B

Distributor C

Distributor D

To limit the credit risk, we invest our excess cash in high-quality securities such as money market mutual funds, certificates of deposit and U.S.

treasury bills.

Note 3—Discontinued Operations

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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.

We received a 50 % royalty on OMIDRIA net sales in the U.S.

following the sale of OMIDRIA.

The occurrence of the milestone event in December 2022 resulted in recognition of the $ 200.0 million Milestone Payment and reduced our royalty rate on U.S.

OMIDRIA net sales (the “U.S.

base royalty rate”) to 30 % until the expiration or termination of the last issued and unexpired U.S.

patent, which we expect to occur no earlier than 2033.

base royalty rate would be 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.

The sale of OMIDRIA was recorded as an asset sale.

Additionally, the results of operations for OMIDRIA are recorded as income from discontinued operations for all periods presented in the consolidated statements of operations and comprehensive income (loss).

The following schedule is a rollforward of the OMIDRIA contract royalty asset (in thousands):

OMIDRIA contract royalty asset at December 31, 2021

Royalties earned

Interest on OMIDRIA contract royalty asset

Remeasurement adjustments

OMIDRIA contract royalty asset at December 31, 2022

During the year ended December 31, 2022, we earned royalties of $ 65.4 million on U.S.

net sales of OMIDRIA, which we recorded as a reduction from the OMIDRIA contract royalty asset.

Additionally, we recorded $ 33.1 million of income in discontinued operations comprising effective interest on the OMIDRIA contract royalty asset and remeasurement adjustments.

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

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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

Gain on sale of OMIDRIA

Milestone income

Interest on OMIDRIA contract royalty asset

Remeasurement adjustments

Income before income tax

Income tax expense (1)

Net income from discontinued operations, net of tax

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)

(1) For further discussion of income tax expense refer to “Note 14 – Income Taxes”.

The year ended December 31, 2021 included a gain on the sale of OMIDRIA comprised as follows (in thousands):

Cash proceeds

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Transaction and closing costs

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

RSUs granted to transferred employees

Prepaid assets and inventory at cost

Gain on sale of OMIDRIA, net

Gain on sale of OMIDRIA

Cash flow from discontinued operations is as follows:

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(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, 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.

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.

Net cash provided by discontinued operations from operating activities

Net cash provided by discontinued operations from investing activities

We historically recorded revenue from product sales when the product was delivered to our wholesalers and title for the product was transferred.

Product sales were recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts.

Accruals or allowances were established for these deductions in the same period when revenue was recognized, and actual amounts incurred were offset against the applicable accruals or allowances.

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

Prior to the sale of OMIDRIA to Rayner, we sold OMIDRIA through four wholesalers.

These wholesalers, including entities under their common control, each accounted for greater than 15 % of our total revenues for the years ended December 31, 2021 and 2020.

Collectively, they accounted for 100 % of our total sales.

These wholesalers, and entities under their common control, each represented greater than 10 % of our accounts receivable as of December 31, 2021 and 2020.

Note 4—Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.

Diluted net income (loss) per share (“Diluted EPS”) is computed by dividing net income (loss) by the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

Our potentially dilutive securities include common shares related to our stock options, warrants, RSUs and unsecured convertible senior notes calculated using the treasury stock method.

In periods where we have a net loss from continuing operations but overall net income, we do not compute Diluted EPS.

Potentially dilutive securities excluded from Diluted EPS are as follows:

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2026 Notes convertible to common stock (1)

2023 Notes convertible to common stock (1)

Outstanding options to purchase common stock

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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”.

Total potentially dilutive shares excluded from net income (loss) per share

(1) The 2023 Notes and 2026 Notes (defined below) are subject to a capped call arrangement that potentially reduces the dilutive effect as described in “Note 8 - Unsecured Convertible Senior Notes”.

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

Note 5—Accounts Receivable, Net

Accounts receivable, net consists of the following:

Note 5—Receivables, Net

Receivables, net consists of the following:

(In thousands)

OMIDRIA milestone receivable

OMIDRIA royalty receivables

Trade receivables, net

Sublease and other receivables

Total accounts receivables, net

Trade receivables are shown net of $ 2.0 million and $ 1.2 million of chargeback and product return allowances as of December 31, 2021 and 2020, respectively.

Total receivables, net

Trade receivables contained no significant chargeback and product return allowance as of December 31, 2022 compared to $ 2.0 million of chargeback and product return allowances as of December 31, 2021.

Based on the nature of our receivables, we determined a reserve for doubtful accounts was not required for the years ended December 31, 2022 and 2021.

Note 6—Fair-Value Measurements

As of December 31, 2021 and 2020, all investments were classified as short-term and available-for-sale.

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

As of December 31, 2022, all investments were classified as held-to-maturity and earnings were included in interest and other income.

As of December 31, 2021, all investments were classified as short-term and available-for-sale.

On a recurring basis, we measure certain financial assets at fair value.

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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 measured at fair value on a recurring basis are as follows:

Our fair-value hierarchy for our financial assets are as follows:

December 31, 2022

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Money-market funds classified as short-term investments

government treasury bills classified as short-term investments

Total short-term investments

Money-market funds classified as non-current restricted investments

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Money-market funds classified as non-current restricted investments

Unrealized gains and losses on our short-term investments were not material for either period presented.

Cash held in demand deposit accounts of $ 11.0 million and $ 100.8 million is excluded from our fair-value hierarchy disclosure as of December 31, 2022 and 2021, respectively.

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

The carrying amounts for receivables, accounts payable and accrued liabilities, and other current monetary assets and liabilities, including lease financing obligations, approximate fair value.

See “Note 9--Unsecured Convertible Senior Notes” for the carrying amount and estimated fair value of our 5.25 % Convertible Senior Notes due 2026 and 6.25 % Convertible Senior Notes due 2023.

See “Note 8 - Unsecured Convertible Senior Notes” and “Note 9 – OMIDRIA Royalty Obligation” for the carrying amount and estimated fair value of our 5.25 % convertible senior notes due 2026, 6.25 % convertible senior notes due 2023 and OMIDRIA royalty obligation.

Note 7—Certain Balance Sheet Accounts

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(In thousands)

Finance leases

Equipment under finance leases

Laboratory equipment

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(In thousands)

Sales rebates, fees and discounts

Consulting and professional fees

Interest payable

Contract research and development

Employee compensation

Clinical trials

Interest payable

Income taxes payable

Consulting and professional fees

Contract research and development

Sales rebates, fees and discounts

Other accrued expenses

Total accrued expenses

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”).

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

Note 8—Unsecured Convertible Senior Notes

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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, 2021

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Unamortized discount

Unamortized issuance costs attributable to liability component

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

Unamortized issuance costs

Net carrying amount of equity component (2)

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

(2) Included in the consolidated balance sheet within additional paid-in capital.

2023 Convertible Senior Notes

In November 2018, we issued $ 210.0 million in aggregate principal amount on our 2023 Notes.

The 2023 Notes are unsecured and accrue interest at an annual rate of 6.25 % per annum, payable semi-annually in arrears on May 15 and November 15 of each year.

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

The 2023 Notes mature on November 15, 2023 unless earlier purchased, redeemed or converted in accordance with their terms and are classified as a current liability on our Consolidated Balance Sheets as of December 31, 2022.

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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In August and September 2020, we issued the 2026 Notes and used approximately $ 125.6 million of the net proceeds to repurchase $ 115.0 million principal amount of the 2023 Notes (see “2026 Convertible Senior Notes” below).

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

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

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

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

The proceeds were recorded as cash with a corresponding increase in additional paid-in capital, and the loss was recorded to other expense in the consolidated statements of operations and comprehensive loss.

As of December 31, 2022, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.

Upon adoption of ASU 2020-06 in January 2021, we removed the equity component allocated to debt issuance costs.

The unamortized debt issuance costs of $ 0.6 million as of December 31, 2022 will be amortized to interest expense at an effective interest rate of 7.0 % over the remaining term.

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

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2026 Convertible Senior Notes

In August and September 2020, we issued $ 225.0 million aggregate principal amount on our 2026 Notes.

The issuance of the 2026 Notes and use of proceeds are as follows:

(In thousands)

2026 Notes principal amount issued

Repurchase of 2023 Notes

Purchase of 2026 Capped Call

Termination of the 2023 Capped Call contracts related to debt repurchased

Issuance costs

Net proceeds available for corporate use

In August and September 2020, we issued $ 225.0 million aggregate principal amount of our 2026 Notes and repurchased $ 125.6 million of our 2023 Notes.

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

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The 2026 Capped Call will expire on various dates over the 50 -trading-day period ranging from December 2, 2025 to February 12, 2026, if not exercised earlier.

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

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

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

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

As of December 31, 2022, approximately 12.2 million shares remained outstanding under the 2026 Capped Call.

We evaluated the accounting for the issuance of the 2026 Notes and concluded that the embedded conversion features meet the requirements for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity in its balance sheet, and that the cash conversion guidance applies.

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

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

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

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

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

Upon adoption of ASU 2020-06 in January 2021, we removed the equity component allocated to debt issuance costs.

The unamortized debt issuance costs of $ 4.1 million as of December 31, 2022 will be amortized to interest expense at an effective interest rate of 5.9 % over the remaining term.

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

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Amortization of debt discount

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

Future Minimum Principal Payments

Future minimum principal for the 2023 and 2026 Notes as of December 31, 2022 are as follows (in thousands):

Total future minimum principal payments under the 2023 Notes and 2026 Notes

Note 9—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 which was recorded as an OMIDRIA royalty obligation on our consolidated balance sheet.

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.

DRI will receive a total of $ 125.0 million in payment no sooner than August 2028, and the maximum future payout that DRI is entitled to receive as of December 31, 2022 is $ 186.8 million which, if fully paid, would be at an effective interest rate of 9.4 %.

The changes in the OMIDRIA royalty obligation during the year ended December 31, 2022 are as follows (in thousands):

Principal amount borrowed at September 30, 2022

Capitalized accrued interest

Principal payments

OMIDRIA royalty obligation at December 31, 2022

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 December 31, 2022, the obligation’s carrying value approximates fair value.

For the year ended December 31, 2022, we incurred $ 2.9 million of interest expense of which $ 1.7 million was non-cash and added to the outstanding principal balance of the OMIDRIA royalty obligation and $ 1.2 million was cash.

As of December 31, 2022, the maximum scheduled principal and interest payments (based on an implied effective interest rate of 9.4 %) are as follows:

(In thousands)

Total future minimum principal payments under the convertible senior notes

Total scheduled payments

Note 10—Lease Liabilities

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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 March 2025.

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

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

In January 14, 2022, we entered into an agreement with our landlord to early terminate a portion of our office and lab premises, 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 on early termination of this portion of our lease.

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

(In thousands)

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Net lease cost

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

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

(In thousands)

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Total lease liabilities

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

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

These licenses may require milestone payments on achievement of clinical development, regulatory or sales milestones, 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, 2022, 2021 and 2020, we paid $ 0.3 million, $ 0.5 million and $ 5.5 million, respectively in development milestones.

Note 12—Shareholders’ Equity

As of December 31, 2022, we had reserved shares of common stock under our equity plans as follows:

Options granted and outstanding

Restricted stock units granted and outstanding

Common stock warrants

Awards available under issuance under the 2017 Plan

Stock options outstanding

RSUs outstanding

Awards available to issue under the 2017 Plan

Total shares reserved

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

In December 2019, we sold 4.4 million shares of our common stock at a public offering price of $ 13.10 per share.

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

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:

We have outstanding warrants to purchase shares of our common stock as follows:

Outstanding At

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Note 13—Stock-Based Compensation

Our equity plans provide for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance units, performance shares and other stock and cash awards to employees, directors and consultants.

Stock options are granted with an exercise price not less than the fair market value of Omeros’ common stock on the date of the grant.

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Employee recurring options grants

Board member initial options grants

33 +% per year for 3 years

Board member recurring options grants

100 % after one year

1/ 48 monthly

Non-employee consultant options grants

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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:

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Total stock-based compensation

In November 2020 and 2021, respectively, restricted stock awards totaling 14,000 shares with a fair value of $ 11.05 per share and 11,700 shares with a fair value of $ 7.80 per share were granted to OMIDRIA sales employees.

The awards vested immediately.

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

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We use the simplified method to calculate expected life used in the valuation of our stock options.

The risk-free interest rate is based on the U.S.

risk-free interest rate is based on the U.S.

Treasury yield curve in effect at the time of grant.

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

Stock option activity for all stock plans is as follows:

Stock option activity for all stock option plans is as follows:

Contractual Life

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Balance at December 31, 2021

( 1,478,588 )

Balance at December 31, 2022

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Exercisable at December 31, 2022

The total intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 was $ 7.8 million, $ 5.6 million and $ 5.4 million, respectively.

At December 31, 2021, there were 3.4 million unvested options outstanding that vest over a weighted-average period of 2.6 years.

The remaining estimated compensation expense to be recognized in connection with these unvested options is $ 27.7 million.

The total intrinsic value of stock options exercised during the years ended December 31, 2022, 2021 and 2020 was $ 0.2 million, $ 7.8 million and $ 5.6 million, respectively.

At December 31, 2022, there were 4.0 million unvested stock options outstanding that vest over a weighted-average period of 2.2 years.

The remaining estimated compensation expense to be recognized in connection with these unvested stock options is $ 19.8 million.

RSU activity for all stock plans is as follows:

Weighted- Average

Balance at December 31, 2021

Vested and released

Balance at December 31, 2022

Note 14—Income Taxes

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

The components of income tax expense (benefit) from continuing and discontinued operations were as follows:

(In thousands)

Continuing operations:

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 tax benefit:

Total deferred income tax benefit

Income tax benefit in continuing operations

Income tax expense as a component of discontinued operations

In 2022 and 2021, for federal and state income tax purposes, we had net losses from continuing operations and net income from discontinued operations, which resulted in overall taxable net income.

For federal income tax purposes, we utilized existing net operating loss carryforwards of $ 269.8 million and $ 245.1 million respectively to fully offset our federal tax liability for both periods.

For state income tax purposes, we did not have adequate net operating losses and tax credits to fully offset our state tax liability.

We recorded a state income tax expense of $ 4.0 million and $ 1.0 million in discontinued operations in 2022 and 2021, respectively.

As of December 31, 2022, income taxes payable of $ 4.9 million is included in accrued expenses in our consolidated balance sheet.

In 2020, we adopted ASU 2019-12, Income Taxes (Topic 740), which eliminated the exception to the incremental approach of intra-period tax allocation whereby losses from continuing operations can no longer offset income from discontinued operations.

This resulted in an income tax benefit of $ 23.3 million in continuing operations and income tax expense of $ 11.2 million in discontinued operations in 2020.

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:

Significant components of deferred income taxes were as follows:

(In thousands)

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Research and development tax credits

OMIDRIA royalty obligation

Capitalized research and development

Stock-based compensation

Lease liability

Disallowed interest expense

Total deferred tax assets

Deferred tax liabilities:

Property and equipment

Gain on discontinued operations

Equity component of Convertible Notes

Right of use assets

Property and equipment

Total deferred tax liabilities

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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.

In certain circumstances, due to ownership changes, our net operating loss and tax credit carryforwards may be subject to limitations under Section 382 of the Internal Revenue Code.

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

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.

Unless previously utilized, research and development tax credit carryforward will expire between 2022 and 2041.

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.

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:

As of December 31, 2022, we had federal net operating loss carryforwards of approximately $ 361.0 million and state net operating loss carryforwards of approximately $ 220.0 million.

Pre-2018 federal net operating losses of $ 109.4 million expire between 2035 and 2037.

Post-2018 federal net operating losses of $ 251.6 million do not expire.

Research and development tax credit carryforwards of $ 79.2 million expire between 2023 and 2042.

The Tax Cuts and Jobs Act was enacted on December 22, 2017 and requires the capitalization and subsequent amortization of research and experimental expenditures beginning in 2022.

During 2022, we capitalized $ 21.9 million of research and development expenses into deferred tax assets.

Prior to 2022, these costs were expensed as incurred for tax purposes.

We established a 100 % valuation allowance for all periods due to the uncertainty around our ability to generate sufficient taxable income to realize our deferred tax assets.

During 2022 and 2021, respectively, our valuation allowance decreased $ 1.9 million and $ 19.3 million.

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

Year ended December 31,

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Change in valuation allowance

Research and development tax credits

Stock compensation

Effective tax rate

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

To date, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted and signed into law in response to COVID-19.

The CARES Act, among other things, includes several significant provisions which impact corporate taxpayers' accounting for income taxes, including a modification to the utilization of net operating losses and interest expense deduction limitations.

The provisions of the CARES Act do not impact our tax provision.

To date, there have been no significant interest or penalties charged to us in relation to the underpayment of income taxes.

Note 15—401(k) Retirement Plan

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What changed 10-K

Item 8. Financial Statements and Supplementary Data