UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________

FORM 10-Q

________________________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2018~~March 31, 2019



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34475

________________________________________

OMEROS CORPORATION

(Exact name of registrant as specified in its charter)



Washington		91-1663741
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

201 Elliott Avenue West Seattle, Washington		98119
(Address of principal executive offices)		(Zip Code)
(206) 676-5000 (Registrant’s telephone number, including area code)

~~(206) 676-5000~~

~~(Registrant’s telephone number, including area code)~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x



Securities Registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Common Stock, $0.01 par value per share	OMER	The Nasdaq Stock Market LLC
(Title of each class)	(Trading symbol)	(Name of each exchange on which registered)

As of ~~November 6, 2018~~May 7, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was ~~49,009,310.~~49,057,866.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, which are subject to the “safe harbor” created by those sections for such statements. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical fact are “forward-looking statements.” Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” “target,” and similar expressions and variations thereof are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying such statements. Examples of these statements include, but are not limited to, statements regarding:


•	our expectations relating to demand for OMIDRIA^® (phenylephrine and ketorolac intraocular solution) 1%/0.3% from wholesalers, ambulatory surgery centers, or ASCs, and hospitals, and our expectations regarding OMIDRIA product sales;

our plans for the marketing and distribution of OMIDRIA and our estimates of OMIDRIA chargebacks and rebates, distribution fees and product returns;

our estimates regarding how long our existing cash, cash equivalents, short-term investments and revenues will be sufficient to fund our anticipated operating expenses, ~~and~~ capital expenditures ~~as well as~~ and debt service obligations;

our ~~interest and principal payments on our outstanding notes under our Term Loan Agreement,~~expectations related to obtaining a permanent separate or similar reimbursement for OMIDRIA from the ~~CRG Loan Agreement, with CRG Servicing LLC,~~Centers for Medicare & Medicaid Services, or ~~CRG, and the lenders identified therein, and the satisfaction of covenants thereunder;~~CMS, particularly for periods after September 30, 2020;

our expectations regarding the clinical, therapeutic and competitive benefits and importance of OMIDRIA and our product candidates;

our expectations related to obtaining permanent separate or similar reimbursement for OMIDRIA from the Centers for Medicare & Medicaid Services, or CMS, and/or from Congress, particularly after September 30, 2020;

our ability to design, initiate and/or successfully complete clinical trials and other studies for our products and product candidates and our plans and expectations regarding our ongoing or planned clinical trials, including for our ~~clinical trials for OMS721, for OMS906~~lead MASP-2 inhibitor, narsoplimab (also referred to as OMS721), and for ~~OMS527;~~OMS527 and OMS906;

in our ~~OMS721 program,~~narsoplimab clinical programs, our expectations regarding: whether enrollment in any or all ongoing and planned Phase 3 and Phase 2 clinical trials will proceed as expected; whether accelerated approval, fast track designation, breakthrough therapy designation and/or orphan drug designation may be granted by the U.S. Food and Drug Administration, or FDA, or conditional marketing authorization, orphan medicinal product designation may be granted by the European Commission, or EC, or the European Medicines Agency, or EMA, as applicable, for indications for which we are pursuing such approval or designation; and whether we can capitalize on the financial and regulatory incentives provided by orphan drug designations granted by the ~~foregoing;~~U.S. Food and Drug Administration, or FDA, the European Commission, or EC, or the European Medicines Agency, or EMA; and whether we can capitalize on the regulatory incentives provided by fast-track and/or breakthrough therapy designations granted by the FDA;

our expectations regarding clinical plans and anticipated or potential paths to regulatory approval of narsoplimab by the FDA and/or EMA in ~~our OMS721 program,~~ hematopoietic stem cell transplant-associated thrombotic microangiopathy (HSCT-TMA), Immunoglobulin A (IgA) nephropathy, and/or atypical hemolytic uremic syndrome (aHUS);

whether and when a Biologics License Application, or BLA, ~~for accelerated approval of OMS721~~ may be filed with the FDA for narsoplimab in any indication and whether the FDA will grant accelerated or ~~full~~regular (full) approval for ~~OMS721; paths to accelerated~~narsoplimab in any indication;

whether and ~~full~~when a marketing authorization application, or MAA, may be filed with the EMA for narsoplimab in any indication, and whether the EMA will grant approval ~~of OMS721~~for narsoplimab in ~~hematopoietic stem cell transplant-associated thrombotic microangiopathy, or HSCT-TMA, and atypicalhemolytic uremic syndrome, or aHUS ; and potential approval with respect to our Phase 3 clinical program for patients with Immunoglobulin A, or IgA, nephropathy;~~

any indication;

our ~~anticipation~~expectation that we will rely on contract manufacturers to manufacture OMIDRIA for commercial sale and to manufacture our product candidates for purposes of clinical ~~trial~~ supply and ~~if approved, for commercial sale;~~in anticipation of potential commercialization;

our ability to enter into acceptable arrangements with potential corporate partners or contract service providers, including with respect to OMIDRIA or our product candidates, and our ability and plans to effect any such ~~arrangements~~arrangement with respect to OMIDRIA in the European Union, or EU, or in other foreign countries;

our ability to raise additional capital through the capital markets or through one or more corporate partnerships, equity offerings, debt financings, collaborations, licensing arrangements or asset sales;

our expectations about the commercial competition that OMIDRIA and our product candidates, if commercialized, face or may face;

the expected course and costs of existing claims, legal proceedings and administrative actions, our involvement in potential claims, legal proceedings and administrative actions, and the merits, potential outcomes and effects of both existing and potential claims, legal proceedings and administrative actions, as well as regulatory determinations, on our business, prospects, financial condition and results of operations;

the extent of protection that our patents provide and that our pending patent applications will provide, if patents ~~issue~~are issued from such applications, for our technologies, programs, products and product candidates;

the factors on which we base our estimates for accounting purposes and our expectations regarding the effect of changes in accounting guidance or standards on our operating results; and

our expected financial position, performance, revenues, growth, costs and expenses, magnitude of net losses and the availability of ~~resources; and~~

the expected course and costs of potential claims, legal proceedings and administrative actions, and the merits, potential outcomes and effects of potential claims, legal proceedings and administrative actions, as well as regulatory determinations, on our business, prospects, financial condition and results of operations.resources.

Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks, uncertainties and other factors described in this Quarterly Report on Form 10-Q under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our other filings with the U.S. Securities and Exchange Commission, or SEC. Given these risks, uncertainties and other factors, actual results or anticipated developments may not be realized or, even if substantially realized, may not have the expected consequences to or effects on our company, business or operations. Accordingly, you should not place undue reliance on these forward-looking statements, which represent our estimates and assumptions only as of the date of the filing of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual results in subsequent periods may materially differ from current expectations. Except as required by applicable law, we assume no obligation to update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

OMEROS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED ~~September 30, 2018~~MARCH 31, 2019

INDEX

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OMEROS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)


	September 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	2,787		$	3,394		$	4,054		$	5,861
Short-term investments	52,369			80,355			43,168			54,637
Receivables, net	2,297			17,144			24,718			22,818
Inventory	214			443			736			88
Prepaid expense	8,334			7,036
Prepaid expense and other assets							4,195			6,463
Total current assets	66,001			108,372			76,871			89,867
Property and equipment, net	2,520			2,121			4,479			3,845
Right of use assets							17,514			—
Restricted investments	5,779			5,835			1,154			1,154
Advanced payments, non-current	1,310			—			1,228			1,070
Total assets	$	75,610		$	116,328		$	101,246		$	95,936
Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable	$	8,847		$	6,691		$	7,121		$	6,281
Accrued expenses	15,180			19,126			34,823			30,186
Current portion of lease financing obligations	560			490
Current portion of lease liabilities							2,561			889
Total current liabilities	24,587			26,307			44,505			37,356
Notes payable and lease financing obligations, net	131,695			84,117
Lease liabilities, non-current							26,578			1,578
Unsecured convertible senior notes, net							151,182			148,981
Deferred rent	8,325			8,718			—			8,177
Commitments and contingencies (Note 7)	—			—
Commitments and contingencies (Note 8)
Shareholders’ deficit:
Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; none issued and outstanding at September 30, 2018 and December 31, 2017, respectively	—			—
Common stock, par value $0.01 per share, 150,000,000 shares authorized; 49,009,310 and 48,211,226 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	490			482
Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; none issued and outstanding at March 31, 2019 and December 31, 2018.							—			—
Common stock, par value $0.01 per share, 150,000,000 shares authorized at March 31, 2019 and December 31, 2018; 49,022,428 and 49,011,684 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.							490			490
Additional paid-in capital	537,104			520,072			552,961			549,479
Accumulated deficit	(626,591		)	(523,368		)	(674,470		)	(650,125		)
Total shareholders’ deficit	(88,997		)	(2,814		)	(121,019		)	(100,156		)
Total liabilities and shareholders’ deficit	$	75,610		$	116,328		$	101,246		$	95,936

See accompanying Notes to Condensed Consolidated Financial Statements

OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Revenue:
Product sales, net	$	4,608		$	21,658		$	7,852		$	51,067		$	21,779		$	1,588

Costs and expenses:
Cost of product sales	36			184			355			613			131			203
Research and development	26,862			14,835			64,414			40,212			26,255			18,140
Selling, general and administrative	13,152			11,749			36,830			40,016			14,632			10,934
Total costs and expenses	40,050			26,768			101,599			80,841			41,018			29,277
Loss from operations	(35,442		)	(5,110		)	(93,747		)	(29,774		)	(19,239		)	(27,689		)
Interest expense	(4,602		)	(2,780		)	(11,104		)	(8,166		)	(5,600		)	(2,825		)
Other income	572			408			1,628			1,010			494			460
Net loss	$	(39,472	)	$	(7,482	)	$	(103,223	)	$	(36,930	)	$	(24,345	)	$	(30,054	)
Comprehensive loss	$	(39,472	)	$	(7,482	)	$	(103,223	)	$	(36,930	)	$	(24,345	)	$	(30,054	)
Basic and diluted net loss per share	$	(0.81	)	$	(0.16	)	$	(2.13	)	$	(0.83	)	$	(0.50	)	$	(0.62	)
Weighted-average shares used to compute basic and diluted net loss per share	48,647,416			46,262,211			48,437,870			44,709,418			49,014,009			48,284,019

See accompanying Notes to Condensed Consolidated Financial Statements

OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Operating activities:
Net loss	$	(103,223	)	$	(36,930	)	$	(24,345	)	$	(30,054	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	8,896			9,449			3,374			2,966
Non-cash interest expense	4,308			3,056			2,201			1,086
Depreciation and amortization	654			378			377			223
Changes in operating assets and liabilities:
Receivables	14,847			(12,534		)	(1,900		)	16,962
Inventory	229			306			(648		)	196
Prepaid expenses and other assets	(2,608		)	(3,925		)	2,110			(840		)
Accounts payable, accrued expenses and other	(2,183		)	8,145
Accounts payable and accrued expenses							5,883			(1,835		)
Net cash used in operating activities	(79,080		)	(32,055		)	(12,948		)	(11,296		)
Investing activities:
Purchases of property and equipment	(474		)	(350		)	(182		)	(183		)
Purchases of investments	(45,514		)	(65,109		)	(281		)	(270		)
Proceeds from the sale and maturities of investments	73,500			22,429			11,750			9,000
Net cash provided by (used in) investing activities	27,512			(43,030		)
Net cash provided by investing activities							11,287			8,547
Financing activities:
Proceeds from issuance of common stock	—			63,627
Proceeds from borrowings under notes payable	44,550			—
Proceeds upon exercise of stock options and warrants	6,720			10,512			108			687
Release of restricted investments	56			—
Payments on lease financing obligations	(365		)	(252		)
Net cash provided by financing activities	50,961			73,887
Payments on finance lease liabilities							(254		)	(143		)
Net cash provided by (used in) financing activities							(146		)	544
Net decrease in cash and cash equivalents	(607		)	(1,198		)	(1,807		)	(2,205		)
Cash and cash equivalents at beginning of period	3,394			2,224			5,861			3,394
Cash and cash equivalents at end of period	$	2,787		$	1,026		$	4,054		$	1,189

Supplemental cash flow information
Cash paid for interest	$	6,796		$	5,110		$	82		$	1,739
Conversion of accrued interest to notes payable	$	3,246		$	2,467		$	—		$	838
Fair value of warrants issued in connection with notes payable amendment	$	1,424		$	—
Property acquired under capital lease	$	579		$	632

See accompanying Notes to Condensed Consolidated Financial Statements

OMEROS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Organization and Significant Accounting Policies

Organization

We are a commercial-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting inflammation, complement-mediated diseases, ~~and~~ disorders of the central nervous ~~system.~~system, and immune-related diseases, including cancers. Our first drug product, OMIDRIA, is marketed in the United States (U.S.) for use during cataract surgery or intraocular lens replacement.

Basis of Presentation

Our condensed consolidated financial statements include the financial position and results of operations of Omeros Corporation (Omeros) and our wholly owned subsidiaries. All inter-company transactions have been eliminated and we have determined we operate in one segment. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information as of ~~September 30, 2018~~March 31, 2019 and for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017~~2018 includes all adjustments, which include normal recurring adjustments, necessary to present fairly our interim financial information. The Condensed Consolidated Balance Sheet at December 31, ~~2017~~2018 has been derived from our audited financial statements but does not include all of the information and footnotes required by GAAP for audited annual financial information.

The accompanying unaudited condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, which was filed with the U.S. Securities and Exchange Commission (SEC) on March 1, ~~2018.~~2019.

~~Going Concern~~

We continue to advance a series of clinical and preclinical programs (including three programs currently in Phase 3). CMS granted transitional pass-through reimbursement status for OMIDRIA from January 1, 2015 through December 31, 2017 for patients covered by Medicare Part B. On ~~an interim~~October 1, 2018, OMIDRIA pass-through reimbursement was reinstated for a two-year period and ~~annual basis~~quarterly OMIDRIA net sales returned to historical levels. We believe OMIDRIA sales will continue to grow in 2019; however, due to the recent re-introduction of OMIDRIA, we cannot predict with precision the extent of growth in OMIDRIA revenues in 2019. As a result, despite our significant historical growth in OMIDRIA sales, meaningful growth in OMIDRIA sales in 2019 and beyond are ~~required to assess~~not included in the determination regarding our ~~ability to continue~~prospects as a going concern for one year after the date the financial statements are issued using rules defined by Accounting Standards Codification (ASC) No. 205-40 - Going Concern (the Standard). As required by the Standard, management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. In the second step of this evaluation, management’s assumptions and plans are derived according to restrictions and definitions in the Standard. As such, for purposes of this exercise, the following assumptions (which are discussed in further detail following this summary) were made:

~~Limited cash receipts from sales of OMIDRIA. Even though we have received an extension of transitional pass-through reimbursement for OMIDRIA for a period of two years effective October 1, 2018,~~concern. Similarly, we are unable ~~at this time~~ to ~~predict accurately revenue~~include in the determination any proceeds from sales of OMIDRIA given that transitional pass-through reimbursement for the product has just recently been reinstated. In addition, sales of OMIDRIA are generally made with 90-day collection terms and, therefore, minimal OMIDRIA cash receipts were included for this exercise prior to January 2019; and

~~No public or private equity~~debt transactions or ~~partnering revenues can be considered for purposes of this exercise~~other financing instruments despite our successful track record in accessing capital through these avenues. We also have not included any potential partnerships related to our products or product candidates. The conditions described above, when evaluated within the ~~absence of any existing or committed arrangements to raise additional capital or of any existing or consummated partnerships.~~

~~In performing the first step~~constraints of the ~~assessment, we concluded that the following conditions~~accounting literature, raise substantial doubt ~~about our ability~~with respect to meet our financial obligations as they become due. As of September 30, 2018, we had $55.2 million in cash, cash equivalents and short-term investments, $2.3 million of accounts receivable and $24.6 million in current liabilities. We have a history of net losses ($103.2 million for the nine months ended September 30, 2018) and use of cash for operations ($79.1 million for the nine months ended September 30, 2018).

~~In performing the second step of this assessment, we are required to evaluate whether our plans to mitigate the conditions above alleviate the substantial doubt about~~ our ability to meet our obligations as they become due within one year after the date the financial statements are issued. In performing this second step of the assessment, we are limited to those assumptions listed above, including nominal revenues from OMIDRIA despite the reinstatement of the product’s pass-through status effective October 1, 2018 pursuant to the Consolidated Appropriations Act of 2018 (Appropriations Act),through May 9, 2020 and, ~~the restrictions and definitions in the Standard. Consequently, based on this assessment performed using the associated limitations required by the~~

~~Standard, we have concluded there is substantial doubt about our ability~~therefore, to continue as a going ~~concern~~concern.

We plan to continue to fund our operations through ~~November 8, 2019.~~

~~Given our inability to assume~~proceeds from sales of OMIDRIA and, if necessary, through other revenue sources and financial instruments as noted above. If these capital sources, for any ~~meaningful OMIDRIA sales revenues for the purpose of this exercise due to only recently reinstated pass-through, if we~~reason, are ~~unable to raise additional equity, debt or partnering capital when~~ needed ~~or upon acceptable terms, such failure~~but inaccessible, it would have a ~~significant~~significantly negative ~~impact on~~effect our financial condition. Should it be necessary to manage our operating expenses, we would reduce our projected cash requirements through reduction of our expenses by delaying clinical trials, reducing selected research and development efforts, and/or implementing other restructuring activities.

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 accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.

~~Revenue Recognition~~

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09- Revenue from Contracts with Customers (Topic 606), which requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 on January 1, 2018 using the modified retrospective transition method.

Once we determine that an arrangement is within the scope of Topic 606 and we believe it is probable that we will collect the consideration, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.

~~Upon adoption, we evaluated our contracts with customers and determined the adoption of the standard did not change the timing or the amounts of our previously recognized revenues.~~

~~Product Sales, Net~~

We generally record revenue from product sales when the product is delivered to our wholesalers. Product sales are recorded net of wholesaler distribution fees and estimated chargebacks, rebates 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 account receivable or as an accrued liability, depending on how the amount is expected to be settled.

The Centers for Medicare & Medicaid Services (CMS) initially granted transitional pass-through reimbursement status for OMIDRIA from January 1, 2015 through December 31, 2017. Pass-through status for OMIDRIA allowed for reimbursement payment to Ambulatory Surgery Centers (ASCs) and hospitals using OMIDRIA in procedures involving patients covered by Medicare Part B. In March 2018, the Appropriations Act was signed into law, which among other things extended pass-through reimbursement status for certain drugs, including OMIDRIA, for a two-year period beginning October 1, 2018. For the period January 1, 2018 through September 30, 2018, OMIDRIA was not yet subject to separate reimbursement for procedures involving patients covered by Medicare Part B.

~~Advanced Payments~~

We have various agreements with third parties that require us to pay part of the contractually due amounts in advance of receiving goods and services. These agreements relate primarily to clinical and manufacturing activities. Amounts paid in advance of services to be delivered to us beyond 12 months of the balance sheet date are recorded as non-current assets.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant items subject to such estimates include revenue recognition, stock-based compensation expense and accruals for clinical trials, manufacturing of drug product and clinical drug supply and contingencies. 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.

~~Recently Adopted Pronouncements~~Revenue Recognition

When we enter into a customer contract, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; 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. 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.

Right-of-Use Assets and Related Lease Liabilities

On January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases, (Topic 842) using a modified retrospective approach. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical assessment of whether 1) contracts contain leases, 2) lease classifications and 3) initial direct costs. Upon adoption we recognized right-of-use assets and lease liabilities of $17.7 million and $26.4 million, respectively, in our Consolidated Balance Sheet. The balance of the net right-of-use asset resulted from the reversal of the outstanding balance of deferred rent of $8.7 million.

We record operating leases on our Consolidated Balance Sheet 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 on our Consolidated Balance Sheet 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.

Advance Payments

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

Stock-Based Compensation

On January 1, 2019, we adopted ASU 2018-05 issued by the FASB in March 2018 related to the Tax Cuts and Jobs Act (Tax Act) that was enacted in December 2017. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21.0%. The standard requires that we record and disclose any provisional amounts related to the Tax Act. We recorded and disclosed the provisional impact to our deferred tax balance in our Annual Report on Form 10-K for the year ended December 31, 2017 that was filed with the SEC on March 1, 2018.

In May 2016, the FASB issued ASU 2017-09 related to stock-based compensation, which provides guidance on the accounting for changes to the terms and conditions of stock-based payment arrangement, or modifications. We adopted the guidance January 1, 2018 and the adoption did not have a material impact on our stock-based compensation expense.

~~Recent Accounting Pronouncements~~

In August 2018, the FASB issued ASU 2018-15 related to the accounting for cloud computing arrangements and to follow the internal-use software guidance in determining which implementation costs to defer and recognize as an asset. The guidance is effective for annual periods, and interim periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. We do not expect the adoption of this accounting guidance to have a material impact on our condensed consolidated financial statements.

~~In June 2018, the FASB issued ASU~~ 2018-07,Compensation— Stock Compensation, (Topic 958) which simplifies the accounting for share-based payments granted to non-employees for services by aligning it with the accounting for share-based payments to employees, with certain exceptions. The ~~guidance~~adoption was immaterial to our consolidated financial statements.

Stock-based compensation expense is recognized for all share-based payments made to employees, directors and non-employees based on estimated fair values as of the date of grant. The fair value of our stock options is calculated using the Black-Scholes option-pricing model which requires judgmental assumptions including volatility, forfeiture rates and expected option life. We use the straight-line method to allocate stock-based compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period.

Recent Accounting Pronouncement Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments — Credit Losses, (Topic 326) which changes how entities account for credit losses on most financial assets and certain other instruments, and expands disclosures. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do not expect the adoption of this accounting guidance to have a material impact on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 related to lease accounting. The new standard requires lessees to recognize a right-of-use asset and a lease liability for most leases. This standard must be applied using a modified retrospective transition method and is effective for all annual and interim periods beginning after December 15, ~~2018.~~2019 with early adoption permitted. We expect to adopt the standard on January 1, ~~2019~~2020 and are still in the process of evaluating the effect of adoption on our consolidated financial statements and ~~are currently assessing our leases.~~

disclosures.

Note 2—Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common share equivalents outstanding for the period, determined using the treasury-stock method. Common share equivalents are excluded from the diluted net loss per share computation if their effect is anti-dilutive.

The basic and diluted net loss per share amounts for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ were computed based on the shares of common stock outstanding during the respective periods. Potentially dilutive securities excluded from the diluted loss per share calculation are as follows:


	September 30,		March 31,
	2018	2017	2019	2018
Outstanding options to purchase common stock	10,123,530	9,813,462	11,840,521	9,640,452
Outstanding warrants to purchase common stock	243,115	100,602	243,115	100,602
Total	10,366,645	9,914,064
Total potentially dilutive shares excluded from loss per share			12,083,636	9,741,054

Note 3—Certain Balance Sheet Accounts

Accounts Receivable, ~~Net~~net

Accounts receivable, net consist of the following:


	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
	(In thousands)				(In thousands)
Trade receivables, net	$	2,165	$	17,079	$	24,580	$	22,654
Sublease and other receivables	132		65		138		164
Total accounts receivables net	$	2,297	$	17,144
Total accounts receivables, net					$	24,718	$	22,818

Trade receivables are shown net of $0.4 million and $0.4 million of chargeback and product return allowances as of March 31, 2019 and December 31, 2018, respectively.

Inventory

Inventory consists of the following:



	March 31, 2019		December 31, 2018
	(In thousands)
Raw materials	$	43	$	83
Work-in-progress	392		—
Finished goods	301		5
Total inventory	$	736	$	88

Property and Equipment, Net

Property and equipment, net consists of the following:



	March 31, 2019			December 31, 2018
	(In thousands)
Finance leases	$	4,863		$	4,034
Laboratory equipment	2,717			2,569
Computer equipment	896			862
Office equipment and furniture	625			625
Total cost	9,101			8,090
Less accumulated depreciation and amortization	(4,622		)	(4,245		)
Total property and equipment, net	$	4,479		$	3,845

For the three months ended March 31, 2019 and 2018, depreciation and amortization expenses were $0.4 million and $0.2 million, respectively.

Accrued Expenses

Accrued expenses consist of the following:



	March 31, 2019		December 31, 2018
	(In thousands)
Contract research and development	$	14,460	$	12,012
Sales rebates, fees and discounts	8,161		8,075
Employee compensation	2,233		2,714
Consulting and professional fees	3,344		3,669
Interest payable	4,995		1,677
Clinical trials	913		820
Other accrued expenses	717		1,219
Total accrued expenses	$	34,823	$	30,186

Note 4—Fair-Value Measurements

As of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, 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, 2018								March 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)								(In thousands)
Assets:
Money-market funds classified as non-current restricted cash and investments	$	5,779	$	—	$	—	$	5,779	$	1,154	$	—	$	—	$	1,154
Money-market funds classified as short-term investments	52,369		—		—		52,369		43,168		—		—		43,168
Total	$	58,148	$	—	$	—	$	58,148	$	44,322	$	—	$	—	$	44,322


	December 31, 2017								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)								(In thousands)
Assets:
Money-market funds classified as non-current restricted cash and investments	$	5,835	$	—	$	—	$	5,835	$	1,154	$	—	$	—	$	1,154
Money-market funds classified as short-term investments	80,355		—		—		80,355		54,637		—		—		54,637
Total	$	86,190	$	—	$	—	$	86,190	$	55,791	$	—	$	—	$	55,791

Cash held in demand deposit accounts of ~~$2.8~~$4.1 million and ~~$3.4~~$5.9 million is excluded from our fair-value hierarchy disclosure as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018, respectively. There were no unrealized gains or losses associated with our short-term investments as of ~~September 30, 2018~~March 31, 2019 or December 31, ~~2017~~2018. The carrying amounts reported in the accompanying Condensed Consolidated Balance Sheets for receivables, accounts payable, other current monetary assets and liabilities ~~and notes payable and lease financing obligations~~ approximate fair value.

~~Note 5—Accrued Liabilities~~

~~Accrued liabilities consist of the following:~~

September 30,
2018 December 31,
2017
(In thousands)
Contract research and development $ 6,760

$ 4,251
Employee compensation 2,993

2,178
Sales rebates, fees and discounts 2,250

6,561
Consulting and professional fees 1,570

1,758
Clinical trials 453

1,026
ASC/hospital product return liability —

2,350
Other accruals 1,154

1,002
Total accrued liabilities $ 15,180

$ 19,126

Note 6—5—Notes Payable ~~and Lease Financing Obligations~~

~~Notes payable and lease financing obligations consist of the following:~~

September 30,
2018 December 31,
2017
(In thousands)
Notes payable $ 132,077
$ 83,831
Lender facility fee payable upon maturity 6,604
4,192
Lease financing obligations 1,513
1,300
Notes payable, facility fee and lease financing obligations 140,194
89,323
Unamortized debt discount (6,510 ) (3,527 )
Unamortized debt issuance costs (1,429 ) (1,189 )
Current portion of lease financing obligations (560 ) (490 )
Non-current portion of notes payable and lease financing obligations, net $ 131,695
$ 84,117

In October 2016, we entered into ~~the~~a term loan agreement with CRG Loan Agreement which permits interest-only payments through December 31, 2020. Subject to the achievement of certain milestones, this interest-only period potentially could be extended through the maturity date of September 30, 2022. InServicing LLC (the CRG Loan) and, in November 2016, we borrowed $80.0 ~~million under the CRG Loan Agreement and, in~~million. In May 2018, we borrowed the remaining $45.0 million available ~~to us~~ under the CRG Loan ~~Agreement.~~and issued warrants to purchase up to 200,000 shares of our common stock with an exercise price of $23.00 per share. The warrants have a five-year term and remained outstanding as of March 31, 2019.

In November 2018, we issued unsecured convertible senior notes (see Note 6 - “Convertible Senior Notes”) and repaid the CRG Loan. Upon repayment, we incurred a loss on early extinguishment of debt of $13.0 million. As of March 31, 2019 and December 31, 2018 we did not have any notes payable outstanding.

Note 6—Convertible Senior Notes

On November 15, 2018, we issued at face value $210.0 million aggregate principal amount of our 6.25% Convertible Senior Notes due 2023 (the Convertible Notes). The ~~CRG Loan Agreement accrues~~Convertible Notes are unsecured and accrue interest at an annual rate of ~~12.25% (4.00%~~6.25% per annum, payable semi-annually in arrears on May 15 and November 15 of ~~which can~~each year, beginning on May 15, 2019.

The Convertible Notes will be ~~deferred~~convertible into cash, shares of our common stock or a combination thereof, as we elect at our ~~option through~~sole discretion. The initial conversion rate is 52.0183 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $19.22 per share of common stock), subject to adjustment in certain circumstances. As of March 31, 2019, all Convertible Notes remain outstanding.

The balance of our Convertible Notes at March 31, 2019 and December 31, ~~2020 by adding such amount to the aggregate principal amount). As of September 30,~~ 2018, is as allowed under the CRG Loan Agreement, we have deferred $7.1 million ($3.2 million for the nine months ended September 30, 2018) of accrued interest by increasing the principal amount outstanding. The CRG Loan Agreement requires us to maintain cash and cash equivalents of $5.0 million during the term of the agreement which is recorded as restricted investments in our Condensed Consolidated Balance Sheet.follows:

We are also required to pay a facility fee equal to 5.00% of the aggregate principal amount borrowed (including principal additions related to deferred interest) on repayment of the CRG Loan Agreement. The facility fee is being accreted to notes payable using the effective interest method over the term of the CRG Loan Agreement.

We may prepay all or a portion of the outstanding principal under the CRG Loan Agreement at any time upon prior notice subject to a 4.00% prepayment fee through September 30, 2019, and with no prepayment fee being owed thereafter. In certain circumstances, including a change of control and certain asset sales or licensing transactions, we are required to prepay all or a portion of the loan, including the applicable prepayment premium on the outstanding principal to be prepaid.



	March 31, 2019			December 31, 2018
	(In thousands)
Principal amount	$	210,000		$	210,000
Unamortized discount	(54,130		)	(56,156		)
Unamortized issuance costs attributable to principal amount	(4,688		)	(4,863		)
Total Convertible Notes, net	$	151,182		$	148,981

For calendar year 2019 and beyond, the CRG Loan Agreement requires us to achieve either (a) certain minimum net revenue amounts through the end of 2021, which is $75.0 million for the 2019 calendar year, or (b) a minimum market capitalization threshold equal to the product of 3.0 multiplied by the aggregate principal amount of loans outstanding under the CRG Loan Agreement determined as of the fifth business day following announcement of earnings results for the applicable year (~~i.e.,~~ $375.0 million). In the event we do not achieve either the minimum revenue amount or the minimum market capitalization threshold for a year, we can satisfy the requirement by raising additional funds through an equity or subordinated debt issuance and using the proceeds to pay down the loan balance by an amount equal to the difference between the minimum revenue amount for such year and the actual revenue amount for such year.

~~The CRG Loan Agreement includes customary events of default (see~~more details on our Convertible Notes see Part II, Item 8, Note ~~7 of the “Notes to Consolidated Financial Statements” included~~8 - “Convertible Senior Notes” in our Annual Report on Form 10-K for the year ended December 31, 2017). If there is an event of default the lenders may have the right to accelerate all our repayment obligations under the CRG Loan Agreement and to take control of our pledged assets, which consists of substantially all of our assets including our intellectual property. Under certain circumstances, a default interest rate of an additional 4.00% per annum will apply to all outstanding obligations during the existence of an event of default.2018.

Note 7—Lease Liabilities

The lease-related assets and liabilities recorded on the balance sheet are as follows. Prior year interim financial statements were not recast under the new standard and, therefore, those amounts are not presented below.




	Classification on the Balance Sheet	March 31, 2019
Assets		(In thousands)
Operating lease assets	Right of use assets	$	17,514
Finance lease assets	Property and equipment, net	3,413
Total lease assets		$	20,927

Liabilities
Current:
Operating Leases	Current portion of lease liabilities	$	1,415
Finance Lease	Current portion of lease liabilities	1,146
Non-current:
Operating	Lease liability, non-current	24,683
Finance	Lease liability, non-current	1,895
Total lease liabilities		$	29,139

Weighted-average remaining lease term
Operating leases		8.6 years
Finance leases		2.9 years
Weighted-average discount rate
Operating leases (1)		12.85		%
Finance leases		12.31		%

(1) Upon adoption of the new lease standard, Topic 842, the discount rate used for existing operating leases was established at January 1, 2019 and represents our incremental borrowing rate.

The components of total lease costs are as follows:



	Three Months Ended March 31, 2019
	(In thousands)
Lease cost
Operating lease cost	$	1,031
Finance lease cost:
Amortization	290
Interest	82
Short-term lease cost	138
Variable lease costs	486
Sublease income	(224		)
Total lease cost	$	1,803

The supplemental cash flow information related to leases during 2019 is as follows:



Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,647
Operating cash flows from finance leases	$	82
Financing cash flows from finance leases	$	254

The future maturities of our lease liabilities as of March 31, 2019 are as follows:



	Operating Leases			Finance Leases
	(In thousands)
2019	$	3,499		$	1,060
2020	4,770			1,224
2021	4,880			866
2022	4,995			290
2023	5,112			95
Thereafter	20,728			—
Total undiscounted lease payments	$	43,984		$	3,535
Less interest	(17,886		)	(494		)
Lease liabilities	$	26,098		$	3,041

As of March 31, 2019, we have a lease for additional space in The Omeros Building that will commence in late 2019. The expected lease term is seven years and the monthly lease payments are approximately $0.1 million over the expected term lease.

Note 7—8—Commitments and Contingencies

Contracts

We have various agreements with third parties that collectively require payment of termination fees totaling $13.7 million as of March 31, 2019 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 as well as low single to low double-digit royalties on the net income or net sales of the product.

~~Contracts~~

We have various agreements with third parties that collectively require payment of termination fees totaling $11.5 million as of September 30, 2018 if we cancel work within specific time frames, either prior to commencing or during performance of For the ~~contracted services. This is in addition to fees associated with the CRG Loan Agreement (see Note 6).~~

~~Litigation~~

In May 2017, we received Notice Letters from Sandoz Inc. (Sandoz) and Lupin Ltd. and Lupin Pharmaceuticals, Inc. (collectively, Lupin), respectively, that Sandoz and Lupin had each filed an Abbreviated New Drug Application (ANDA) seeking approval from the U.S. Food and Drug Administration (FDA) to market a generic version of OMIDRIA prior to the expiration our patents covering OMIDRIA. In June 2017, we filed patent infringement lawsuits against Sandoz and Lupin. In May 2018, we entered into a settlement agreement and consent judgment with Lupin resolving our patent litigation against Lupin and, in July 2018, our patent infringement lawsuit against Sandoz was dismissed by stipulation of the parties based on Sandoz’s revision of its Patent and Exclusivity Certification to a Paragraph III certification with respect to the patents-in-suit. As a result of an earlier settlement in October 2017 involving substantially similar assertions with Par Pharmaceutical, Inc. and its subsidiary, Par Sterile Products, LLC (collectively, Par), the Lupin settlement agreement and consent judgmentthree months ended March 31, 2019 and the ~~Sandoz dismissal, all of our litigation with ANDA filers has been concluded. Based on the Par~~year ended December 31, 2018, development milestones incurred were immaterial and ~~Lupin settlement agreements and Sandoz’s conversion to a Paragraph III certification, the earliest ANDA entry date for~~we did not owe any ~~of the three generic manufacturers is April 2032 unless otherwise subsequently authorized pursuant to the settlement agreements.~~royalties.

Note 8—9—Shareholders’ ~~Equity~~Deficit

Common Stock

For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, we received proceeds of ~~$6.7~~$0.1 million upon the exercise of stock options which resulted in the issuance of ~~763,575~~10,744 shares of common stock. For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, we received proceeds of ~~$10.5~~$0.7 million upon the exercise of stock options and warrants which resulted in the issuance of ~~628,470~~75,616 shares of common stock.

Warrants

In connection with the April 2018 amendment to the CRG Loan ~~Agreement,~~and the May 2018 borrowing under the CRG Loan, we issued warrants to purchase up to 200,000 shares of our common stock with an exercise price of $23.00 per share and total fair value of $1.4 million. The warrants have a five-year ~~term.~~term and remain outstanding as of March 31, 2019.

~~In September 2018, other warrant holders with a right to purchase 57,487 shares~~Interim Condensed Consolidated Statements of Shareholders’ Deficit

The changes in interim balances of the components of our ~~common stock exercised their warrants. In conjunction with this cashless exercise, we issued 34,509 shares of our common stock.~~shareholders’ deficit are as follows:



	Three Months Ended March 31,
	2019			2018
	(In thousands)

Beginning and ending common stock	$	490		$	483

Beginning additional paid-in capital	$	549,479		$	520,071
Exercise of stock options	108			687
Stock-based compensation expense	3,374			2,966
Ending additional paid-in capital	$	552,961		$	523,724

Beginning accumulated deficit	$	(650,125	)	$	(523,368	)
Net loss	(24,345		)	(30,054		)
Ending accumulated deficit	$	(674,470	)	$	(553,422	)

Note 9—10—Stock-Based Compensation

Stock-based compensation expense includes the amortization of stock options granted to employees and non-employees and has been reported in our Condensed Consolidated Statements of Operations and Comprehensive Loss as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
	(In thousands)				(In thousands)				(In thousands)
Research and development	$	1,334	$	1,297	$	3,720	$	4,034	$	1,494	$	1,200
Selling, general and administrative	1,595		1,744		5,176		5,415		1,880		1,766
Total	$	2,929	$	3,041	$	8,896	$	9,449	$	3,374	$	2,966

The fair value of each option grant to employees, directors and ~~directors~~non-employees is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were applied to ~~employee and director~~all stock option ~~grants as follows:~~grants:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Estimated weighted-average fair value	$	16.30		$	13.66		$	10.22		$	8.38		$	9.47		$	9.79
Weighted-average assumptions
Expected volatility	78		%	74		%	77		%	74		%	81		%	76		%
Expected term, in years	6.1			6.1			6.0			6.0			6.0			6.1
Risk-free interest rate	2.77		%	1.95		%	2.66		%	1.99		%	2.48		%	2.54		%
Expected dividend yield	—		%	—		%	—		%	—		%	—		%	—		%

Stock option activity for all stock plans and related information is as follows:

Options
Outstanding

Weighted-
Average
Exercise
Price per
Share

Remaining
Contractual Life
(In years)

Aggregate
Intrinsic
Value
(In thousands)
Balance at December 31, 2017 9,657,259
$ 10.39

   Granted 1,692,207
14.91

   Exercised (763,575 ) 8.80

   Forfeited (462,361 ) 13.39

Balance at September 30, 2018 10,123,530
$ 11.13
6.6044 $ 134,484
Vested and expected to vest at September 30, 2018 9,818,340
$ 11.06
6.5344 $ 131,102
Exercisable at September 30, 2018 7,155,818
$ 10.13
5.6582 $ 102,201



	Options Outstanding		Weighted- Average Exercise Price per Share		Remaining Contractual Life (In years)	Aggregate Intrinsic Value (In thousands)
Balance at December 31, 2018	10,313,138		$	11.22
Granted	1,606,500		13.49
Exercised	(10,744	)	10.01
Forfeited	(68,373	)	14.67
Balance at March 31, 2019	11,840,521		$	11.51	6.62	$	71,857
Vested and expected to vest at March 31, 2019	11,402,367		$	11.41	6.53	$	70,182
Exercisable at March 31, 2019	7,815,290		$	10.31	5.35	$	56,232

At ~~September 30, 2018,~~March 31, 2019, there were ~~2,967,712~~4,025,230 unvested options outstanding that will vest over a weighted-average period of ~~2.8~~9.1 years and ~~2,210,945~~554,083 shares were available to grant. ~~Excluding non-employee stock options, the~~The total estimated compensation expense to be recognized on our unvested options is ~~$32.3~~$15.6 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Our drug product OMIDRIA^® is marketed in the United States ~~or U.S.,~~ for use during cataract surgery or intraocular lens, or IOL, replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative pain. In our pipeline we have clinical-stage development programs focused on: complement-associated thrombotic microangiopathies; complement-mediated glomerulonephropathies; ~~cognitive impairment;~~ and addictive and compulsive disorders. In addition, we have a diverse group of preclinical programs and two platforms: one capable of unlocking new G protein-coupled receptor, or GPCR, drug targets and the other used to generate antibodies. For OMIDRIA and each of our product candidates and our programs, we have retained control of all commercial rights.

Commercial ~~Products,~~ Product ~~Candidates, Development Programs and Platforms~~

- OMIDRIA. ^®(phenylephrine and ketorolac intraocular solution) 1%/0.3%

OMIDRIA is approved inby the ~~U.S.by the U.S. Food and Drug Administration, or~~ FDA for use during cataract surgery or IOL replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative ocular pain. InOutside of the U.S., we have received approval from the European Commission, or EC, to market OMIDRIA in the European Economic Area, or EEA, for use during cataract surgery and other IOL replacement procedures for maintenance of intraoperative mydriasis (pupil dilation), prevention of intraoperative miosis and reduction of acute postoperative ocular pain. OMIDRIA is ~~sold~~a proprietary drug product containing two active pharmaceutical ingredients, or APIs: ketorolac, an anti-inflammatory agent, and phenylephrine, a mydriatic, or pupil dilating, agent. Cataract and other lens replacement surgery involves replacement of the original lens of the eye with an artificial intraocular lens. These procedures are typically performed to replace a lens opacified by a cataract and/or to correct a refractive error. OMIDRIA is added to standard irrigation solution used during cataract and lens replacement surgery and is delivered intracamerally, or within the anterior chamber of the eye, to the site of the surgical trauma throughout the procedure. Preventing pupil constriction is essential for these procedures and, if miosis occurs, the risk of damaging structures within the eye and other complications increases, as does the operating time required to perform the procedure.

We launched OMIDRIA in the U.S. in the second quarter of 2015 and sell OMIDRIA primarily through wholesalers which, in turn, sell to ASCs and hospitals. The Centers for Medicare & Medicaid Services, or CMS, the federal agency responsible for administering the Medicare program, granted transitional pass-through reimbursement status for OMIDRIA in 2014, effective from January 1, 2015 through December 31, 2017. Pass-through status allows for separate payment (~~i.e.~~(i.e., outside the ~~procedural~~ packaged payment ~~rate)~~rate for the surgical procedure) under Medicare Part B. In March 2018, the Consolidated Appropriations Act of 2018, or the Appropriations Act, was signed into law. The Appropriations Act includes a provision ~~that extends~~by which Congress extended pass-through reimbursement status for a small number of drugs, including OMIDRIA, used during procedures performed on Medicare Part B fee-for-service patients for an additional two years, running from October 1, 2018 until October 1, 2020. ~~As a result of this extension, each of these drugs, including OMIDRIA, receives separate payment for the two-year period that began on October 1, 2018.~~ We also continue to pursue permanent separate reimbursement for OMIDRIA. In the ~~recently released~~ 2019 final rule for CMS’ outpatient prospective payment system, or OPPS, CMS indicated that, in the ASC setting, it will separately pay ~~in the ASC setting~~ for certain non-opioid drugs used during surgery that have an FDA-approved indication for postoperative pain relief and are currently packaged with the procedure in calendar year 2019. Although OMIDRIA is not specifically named because it currently is paid separately, we believe that OMIDRIA meets this ~~definition. The preamble to~~definition and would qualify for separate payment under this ~~section of the OPPS Final Rule indicates that CMS will apply the exclusion from packaged payment to other drugs~~provision if it is continued in ~~the future if they meet the criteria.~~subsequent years. The OPPS Final Rule also states that CMS will consider in future rule-making a policy that pays separately for drugs used during cataract surgery that have an FDA-approved indication to address postoperative issues. We believe that OMIDRIA also meets this definition. We are continuing to confirm these beliefs and to pursue other avenues of permanent separate payment or similar reimbursement for OMIDRIA beyond September 30, 2020 but we cannot provide assurance that these efforts will be successful. We also continue to pursue expansion of reimbursement for OMIDRIA by Medicare Advantage and other third-party payers. OMIDRIA revenues in the first three quarters of 2018 were significantly reduced due to the expiration of pass-through reimbursement status on January 1, 2018. Since pass-through reimbursement was reinstated on October 1 of this year, weekly sales of OMIDRIA have increased substantially from levels seen during the first nine months of the year. For more information regarding OMIDRIA reimbursement, see “Results of Operations” ~~and “Financial Condition - Liquidity and Capital Resources”~~ below.

In October 2017 and May 2018, we entered into a settlement agreement and consent judgment with Par Pharmaceutical, Inc. and its subsidiary, Par Sterile Products, LLC, or collectively Par, and with Lupin Ltd. and Lupin Pharmaceuticals, Inc., or collectively Lupin, respectively, resolving our patent infringement lawsuits against these companies that resulted from each having filed with the FDA an Abbreviated New Drug Application, or ANDA, containing a Paragraph IV Certification under the Hatch-Waxman Act seeking approval to market a generic version of OMIDRIA prior to the expiration of our Orange Book Patents for OMIDRIA. In addition, in July 2018 we announced that our patent infringement lawsuit against Sandoz, Inc., or Sandoz, which had also filed an ANDA containing a Paragraph IV Certification seeking approval to market a generic version of OMIDRIA, had been dismissed by stipulation of the parties based on Sandoz’s conversion to Paragraph III certifications with respect to the patents covering OMIDRIA. As a result, all of our litigation with ANDA filers has been concluded. Based on the Par and Lupin settlement agreements and Sandoz’s conversion to a Paragraph III certification, the earliest ANDA entry date for any of the three generic manufacturers is April 2032 unless otherwise subsequently authorized pursuant to the settlement agreements. For more information regarding these matters, see Part II, Item 1, “Legal Proceedings.”

Outside of the U.S., we have received approval from the European Commission, or EC, to market OMIDRIA in the European Economic Area, or EEA, for use during cataract surgery and other IOL replacement procedures to maintain mydriasis (pupil dilation), to prevent miosis (pupil constriction), and to reduce postoperative eye pain. In July 2018, we reported that OMIDRIA had been placed on the market in the European Union, or EU, on a limited basis, which maintained the ongoing validity of the European marketing authorization for OMIDRIA. Decisions about price and reimbursement for OMIDRIA are made on a country-by-country basis and may be required before marketing may occur in a particular country. Timing of any partnerships or independent launch depends on numerous factors, including domestic sales of OMIDRIA, completion of mutual diligence exercises and/or entry into suitable agreements with contract service vendors. In addition, we have an exclusive supply and distribution agreement for the sale of OMIDRIA in certain countries in the Middle East, including the Kingdom of Saudi Arabia and the United Arab Emirates, under which sales began on a limited basis in the Kingdom of Saudi Arabia in 2016. At this time we do not expect to see significant sales of OMIDRIA in any countries within the EEA or

other international ~~territories if we are unable to enter into partnerships~~territories. We have an exclusive supply and distribution agreement with ITROM Trading Drug Store, or ITROM, for the ~~marketing and distribution~~sale of OMIDRIA ~~or complete an independent broad launch~~ in ~~any such country.~~the Kingdom of Saudi Arabia, the United Arab Emirates and certain other countries in the Middle East. Under our agreement, ITROM is responsible for obtaining marketing authorizations for OMIDRIA on our behalf and for promoting, marketing, selling and distributing product supplied by us within the licensed territory. ITROM began selling OMIDRIA in December 2016 on a limited basis in the Kingdom of Saudi Arabia. Revenues to date under our agreement with ITROM have not been material.

~~Product Candidates.~~ ~~We have the following clinical-stage~~Clinical Development Programs

Our clinical stage development programs ~~in our pipeline:~~include:

MASP-2 - ~~OMS721~~narsoplimab (OMS721) - Lectin Pathway Disorders.Narsoplimab, also referred to as OMS721, is our lead human monoclonal antibody targeting mannan-binding lectin-associated serine protease-2, or MASP-2. MASP-2 is a novel pro-inflammatory protein target involved in activation of the complement system. The complement system plays a role in the body’s inflammatory response and becomes activated as a result of tissue damage or trauma or microbial pathogen invasion. Inappropriate or uncontrolled activation of the complement system can cause diseases characterized by serious tissue injury. MASP-2 is the effector enzyme of the lectin pathway of the complement ~~system. The~~system, and the current development focus for ~~OMS721~~narsoplimab is diseases in which the lectin pathway has been shown to contribute to significant tissue injury and pathology. ~~These~~When not treated, these diseases are typically characterized by significant end organ injuries, such as kidney or central nervous system ~~injury, when not treated.~~injury. Phase 3 clinical programs are underway for ~~OMS721 in HSCT-TMA, in~~narsoplimab in: hematopoietic stem cell transplant-associated thrombotic microangiopathy, or HSCT-TMA; Immunoglobulin A, or IgA, ~~nephropathy,~~nephropathy; and in atypical hemolytic uremic syndrome, or aHUS. In addition, we have ~~two~~an ongoing ~~OMS721~~ Phase 2 clinical ~~trials, one in patients with TMAs and the other~~trial evaluating narsoplimab in renal diseases, currently focused on patients with IgA nephropathy. ~~We are also developing small-molecule inhibitors of MASP-2 designed for oral administration that we are targeting for initiation of clinical trials in 2020.~~

~~The~~Narsoplimab has received multiple designations from the FDA and from the EMA across the three current indications. These include:

HSCT-TMA: In the U.S., the FDA has granted narsoplimab (1) breakthrough therapy designation ~~to OMS721 for the treatment of HSCT-TMA~~ in patients who have persistent TMA despite modification of immunosuppressive therapy, ~~or high-risk~~(2) orphan drug designation for the prevention (inhibition) of complement-mediated TMAs, and (3) orphan drug designation for the treatment of HSCT-TMA. The EC also granted narsoplimab a designation as an orphan medicinal product for treatment in hematopoietic stem cell transplantation.

IgA nephropathy: In the U.S., narsoplimab has received from the FDA (1) breakthrough therapy designation for the treatment of IgA nephropathy and (2) orphan drug designation in IgA nephropathy. In Europe, narsoplimab has received from the EC designation as an orphan medicinal product for the treatment of primary IgA nephropathy.

aHUS: In the U.S., narsoplimab has received from the FDA (1) fast-track designation for the treatment of patients with aHUS and (2) orphan drug designation for the prevention (inhibition) of complement-mediated thrombotic microangiopathies.

Previously announced results from patients with HSCT-TMA in our ongoing Phase 3 program demonstrated an increase in estimated median survival and in 100-day mortality compared to a literature-based control. In addition to and consistent with the survival data reported, assessments of platelet count, lactate dehydrogenase, and haptoglobin - all markers of TMA activity - demonstrated clinically meaningful and statistically significant improvements in the HSCT-TMA patients treated with narsoplimab. Improvement in transfusion requirements and organ function were also observed. No safety concerns were identified. Adverse events and causes of death were consistent with the patients’ underlying diseases.

We continue to ~~work closely~~receive compassionate-use requests from physicians worldwide seeking narsoplimab treatment for adult and pediatric patients with HSCT-TMA. We believe these requests reflect the growing recognition within the stem-cell transplant community of the high incidence and severity of this transplant complication. Historically, the literature-based incidence of HSCT-TMA has been varied, with some smaller centers and national registries reporting low numbers of cases while major research institutions reported incidences in the range of 15-25 percent. More recently, however, as TMA has become better understood and identified, its reported occurrence has been approximately 40 percent in patients undergoing allogeneic hematopoietic stem cell transplants in centers that screen for the disease. The condition is associated with an increased mortality rate and, in those patients who survive, it often causes chronic kidney damage.

Based on discussions with the FDA and the EMA regarding expectations for our marketing applications (BLA and MAA), we plan to submit for regulatory approval of narsoplimab for HSCT-TMA with data from the currently treated HSCT-TMA patients. To support the BLA and MAA, we will collect additional data on patients already enrolled in the ongoing HSCT-TMA clinical trial and on HSCT-TMA patients previously or currently being treated with narsoplimab under compassionate use protocols. We anticipate that data from the currently treated HSCT-TMA patients will provide adequate data to support regulatory approval. We have met ~~recently~~ with the FDA and with multiple European national regulatory authorities to discuss potential approval pathways for ~~OMS721~~narsoplimab for the treatment of HSCT-TMA. Feedback from the European national regulatory authorities has been positive, and includes uniform ~~recommendation~~support to submit ~~a marketing authorization application, or~~an MAA for full approval of ~~OMS721~~narsoplimab in HSCT-TMA. We ~~next~~recently met with FDA to finalize endpoints to be used for approval and we are collecting the additional clinical data needed for marketing applications. We have already written the nonclinical sections of the BLA and are discussing with FDA the final schedule for a rolling BLA submission. We also plan to request a ~~centralized advice~~ meeting with ~~EMA’s Committee~~the rapporteur and co-rapporteur in Europe, who will work with us through the MAA submission and review process for ~~Human Medicinal Products, or CHMP.~~narsoplimab in HSCT-TMA. We have already applied for, and EMA confirmed, eligibility to EMA’s centralized review procedure, which allows submission of a single MAA that, if approved, authorizes the product to be marketed in all EU member states and ~~European Free Trade Association~~EEA countries rather than requiring separate national approvals. We ~~have also provided EMA with~~are finalizing our ~~letter~~Pediatric Investigational Plan in Europe, which is a prerequisite for submission of ~~intent to submit an MAA and look forward to receiving assignment of our rapporteur and co-rapporteur who will work with us through~~ the MAA submission and review process for OMS721 in stem-cell TMA. We intend to begin collection of chart-review-based historical data following further discussion with the FDA and finalization of the data collection and analysis plan. The comparison of OMS721-treated patients to the historical control is designed to support accelerated approval in the U.S. and full approval in Europe. Close interactions with the FDA and European regulatory agencies are ongoing andas we continue preparations for U.S. ~~Biologics License Application, or~~ BLA and European MAA submissions. We were also notified by FDA that FDA and EMA held a joint meeting at which harmonization of the pediatric development of narsoplimab for stem-cell TMA was specifically discussed.

In April 2018, we reported interim results in patients with HSCT-TMA from the ongoing Phase 2 study. The analysis of 100-day mortality, an important endpoint previously used as an approval endpoint in another condition related to HSCT, showed that OMS721-treated patients had improved survival relative to the historical control (53% vs 10%; p = 0.0002).

~~For the~~our IgA nephropathy program, patient enrollment ~~is ongoing~~continues in ~~our OMS721~~the narsoplimab Phase 3 clinical trial, ~~which~~ARTEMIS-IGAN. The single Phase 3 trial design is ~~referred to as ARTEMIS-IGAN,~~a randomized, double-blind, placebo-controlled multicenter trial in patients at least 18 years of age with biopsy-confirmed IgA nephropathy and with 24-hour urine protein excretion greater than one gram per day at baseline on optimized renin‑angiotensin system, or RAS, blockade. This trial includes a run-in period. Initially, patients are expected to receive an IV dose of study drug each week for 12 weeks; additional weekly dosing can be administered to achieve optimal response. The primary endpoint, which could suffice for ~~this trial~~full or accelerated approval depending on the effect size, is reduction in ~~proteinuria.~~proteinuria at 36 weeks after the start of dosing. The trial is designed to allow intra-trial adjustment in sample size. For the purposes of safety and efficacy assessments, the initial sample size for the proteinuria endpoint is estimated at 140 patients in each of the treatment and placebo groups. This ~~trial includes~~will include a subset of patients with ~~baseline proteinuria~~high levels of ~~two~~proteinuria (i.e., equal to or ~~more grams per day~~greater than 2 g/day) at baseline, and ~~is designed to include pathways~~a substantial improvement at 36 weeks in this subset of patients alone could potentially form the basis for ~~both~~approval. We believe that the trial design will allow assessment for either full or accelerated ~~and full approvals depending~~approval at 36 weeks based on proteinuria results either (1) across the ~~magnitude and duration~~general population of ~~the effect on proteinuria.~~

~~In October 2018, we reported new interim results in~~study patients ~~with IgA nephropathy from the ongoing Phase 2 clinical trial. These patients represent the second reported cohort of IgA nephropathy patients~~or (2) in the ~~trial. The objective~~high-proteinuria subset of the cohort was to assess safety and to provide longer-term observation with the option of repeat dosing, and the analyses were prespecified to provide descriptive data on the effects of OMS721 in a small number of patients. ~~Unlike the~~

previously reported first cohort of four IgA nephropathy patients who were taking corticosteroids at the time of study enrollment, patients in the second cohort are not taking steroids. The cohort included 12 patients, of which three had confounding factors making meaningful interpretation unreliable and thus were excluded from the analysis. There was no “run-in” period in this study. Patients were treated for 12 weeks with weekly dosing of either OMS721 or placebo, then were followed for six weeks with no treatment. After week 18, patients initially treated with placebo and patients initially treated with OMS721 were able to receive additional 12-week courses of dosing with OMS721 at investigator discretion. The study is ongoing and patients in the second cohort may receive more than one 2-week course of OMS721 and will be followed for two years. At the time of data reporting, four patients were in the study for between nine months and one year. The remaining patients were in the study for between 18 weeks and nine months. At week 18, median reduction in proteinuria was 18.4% in the five OMS721-treated patients and 18.0% in the four placebo patients. The one OMS721-treated patient whose proteinuria level remained elevated after the initial treatment course subsequently reached a 67.8% reduction from baseline following an additional course of OMS721 dosing.

After week 18 when all patients with elevated proteinuria are eligible at physician discretion to receive OMS721, median reduction from baseline in proteinuria was 56% for the eight patients who had at least 18 weeks of data and was 61% for the four patients who had over nine months of data, improvements that we believe are not consistent with the natural history of the disease. Four patients in this OMS721 dosing-extension period have reached between 9 and 12 months beyond baseline, and show reductions in proteinuria of 54 percent, 57 percent, 65 percent, and 68 percent. At most recent assessment, two of these four patients continued to demonstrate sustained reductions in proteinuria for 2.5 and 5 months, respectively, after cessation of treatment with OMS721; the other two patients just recently completed treatment courses. All of these patients in the follow-up period received at least one 12-week course of treatment with OMS721; five of the eight had received only one course of OMS721 treatment at the time of data release. Despite a small cohort of patients, and although median reductions in proteinuria in the placebo group were comparable to those in the OMS721 group following the initial 12-week course of treatment, we and international experts in IgA nephropathy we have consulted believe that these data are strongly positive and supportive of a disease modifying effect, with proteinuria reduction ranging from greater than 50% to approximately 70%, a magnitude consistent with what we previously reported from the first cohort of this clinical trial.

The Phase 3 clinical program in patients with aHUS, in which patient enrollment is ongoing, consists of one Phase 3 clinical trial – a single-arm (i.e., no control arm), open-label trial in patients with newly diagnosed or ongoing aHUS. This trial is targeting approximately 40 patients for full approval in Europe and accelerated approval in the U.S. with approximately 80 total patients required by FDA for full ~~approval.~~

~~OMS721 has received multiple designations from the FDA and from the EMA across the three current indications. These include:~~

HSCT-TMA: In the U.S., the FDA has granted OMS721 (1) breakthrough therapy designation in patients who have persistent TMA despite modification of immunosuppressive therapy, (2) orphan drug designation for the prevention (inhibition) of complement-mediated TMAs, and (3) orphan drug designation for the treatment of HSCT-TMA. The EC also granted OMS721 a designation as an orphan medicinal product for treatment in hematopoietic stem cell transplantation.

IgA nephropathy: In the U.S., OMS721 has received from the FDA (1) breakthrough therapy designation for the treatment of IgA nephropathy and (2) orphan drug designation in IgA nephropathy. In Europe, OMS721 has received from the EC designation as an orphan medicinal product for the treatment of primary IgA nephropathy.

aHUS: In the U.S., OMS721 has received from the FDA (1) fast-track designation for the treatment of patients with aHUS and (2) orphan drug designation for the prevention (inhibition) of complement-mediated TMAs, which includes aHUS.

~~PDE10 - OMS824.~~ In our OMS824 program, we continue to advance our phosphodiesterase 10, or PDE10, inhibitors for treatment of neurological disorders. The FDA has authorized our conduct of clinical trials in Huntingdon’s disease with our lead candidate subject to dosing limitations. Given the dosing limitations, we are currently focused on assessing the relative advantages of a number of our back-up compounds and potential indications.

~~PPARγ - OMS405~~. In our peroxisome proliferator-activated receptor gamma, or PPARγ, program, Phase 2 clinical trials have been conducted by our collaborators to evaluate a PPARγ agonist, alone or in combination with other agents, and have yielded positive dataapproval in the ~~treatment of addiction to heroin and to nicotine. We have also reported positive results (~~U.S.~~i.e.~~, decreased craving and protection of brain white matter) from a Phase 2 clinical trial conducted by an independent investigator evaluating the effects of a PPARγ agonist in patients with cocaine use disorder.

PDE7 - ~~OMS527.~~OMS527. In our phosphodiesterase 7, or PDE7, program, we are developing proprietary compounds to treat addiction and compulsive disorders as well as movement disorders. A Phase 1 single-ascending- and multiple-ascending-dose clinical trial is underway and is designed to assess safety and pharmacokinetics of ~~the~~our lead compound in healthy subjects. We have completed dosing in ~~the first~~all six cohorts in the single-ascending-dose portion of ~~subjects and have studied~~the trial, including a cohort to assess whether pharmacokinetics is affected by food. Dosing in three cohorts in the multiple-ascending-dose portion of the trial also recently completed. The compound to date has been well tolerated and pharmacokinetic data support once-daily dosing, with or without food. Completion of the Phase 1 trial is expected in the ~~first half~~second or third quarter of 2019. Following Phase 1 completion, if successful, we plan to conduct ~~our initial OMS527~~a Phase ~~2 clinical trial in patients with~~2a study targeting nicotine addiction.

Preclinical Development Programs and ~~Platforms.~~ Platforms

Our preclinical programs and platforms include:

MASP-3 - OMS906 - Alternative Pathway Disorders. InAs part of our complement target program, we have identified mannan-binding lectin-associated serine protease-3, or MASP-3, ~~program,~~which has been shown to be the key activator of the complement system’s alternative pathway, or APC. We believe that we are the first to make this and related discoveries associated with the APC. The complement system is part of the immune system’s innate response, and the APC is considered the amplification loop within the complement system. MASP-3 is responsible for the conversion of pro-

factor D to factor D, and converted factor D is necessary for the activation of the APC. Based on our alternative pathway-related discoveries, we have expanded our intellectual property position to protect our inventions stemming from these discoveries beyond MASP-2-associated inhibition of the lectin pathway to include inhibition of the alternative pathway. Our current primary focus in this program is developing MASP-3 inhibitors for the treatment of disorders related to the ~~alternative pathway~~APC. We believe that MASP-3 inhibitors have the potential to treat patients suffering from a wide range of ~~the complement system. MASP-3 is thought to be the key activator~~diseases and conditions, including: paroxysmal nocturnal hemoglobinuria, or PNH; C3 glomerulopathy; multiple sclerosis; arthritis; traumatic brain injury; neuromyelitis optica; pauci-immune necrotizing crescentic glomerulonephritis; disseminated intravascular coagulation; age-related macular degeneration; asthma; dense deposit disease; Bechet’s disease; aspiration pneumonia; TMA; ischemia-reperfusion injury; Guillain Barre syndrome; Alzheimer’s disease; amylotrophic lateral sclerosis; systemic lupus erythematosus; diabetic retinopathy; uveitis; chronic obstructive pulmonary disease; transplant rejection; acute respiratory distress syndrome; antineutrophil cytoplasmic antibody-associated vasculitis; anti-phospholipid syndrome; atherosclerosis; myasthenia gravis and others. Our OMS906 program has generated positive data in a well-established animal model associated with PNH including in non-human primates. The program has also generated positive data in a well-established model of ~~the alternative pathway.~~arthritis. In preparation for clinical trials, the manufacturing scale-up process is underway for a MASP-3 inhibitor antibody and we are currently targeting ~~paroxysmal nocturnal hemoglobinuria, or~~ PNH as the first clinical indication for OMS906. WeNonclinical human-dose-enabling studies are ~~currently planning~~planned for this year and we anticipate clinical trials to begin in ~~late 2019 or early~~the first half of 2020.

Other MASP Inhibitor Preclinical Programs. We have generated positive preclinical data from MASP-2 inhibition in in vivo models of age-related macular degeneration, myocardial infarction, diabetic neuropathy, stroke, ischemia-reperfusion injury, and other diseases and disorders. We are also developing small-molecule inhibitors of ~~MASP-3.~~MASP-2 designed for oral administration that we are targeting for initiation of clinical trials in 2020, as well as additional antibodies targeting MASP-2. Development efforts are also directed to small-molecule inhibitors of MASP-3 and bispecific small- and large-molecule inhibitors of MASP-2/-3.

GPCR Platform and Programs. We have developed a proprietary cellular redistribution assay, or CRA, which we use in a high-throughput manner to identify synthetic ligands, including antagonists, agonists and inverse agonists, that bind to and affect the function of orphan GPCRs. We are conducting in vitro and in vivo preclinical efficacy studies and optimizing compounds for a number of targets including: GPR151, which is linked to schizophrenia and ~~cognition;~~cognition and GPR161, which is associated with triple negative breast cancer and various ~~sarcomas; and GPR174, which~~sarcomas. One of our priorities in this program is ~~involved in modulation of the immune system and, in animal and~~ ~~ex vivo~~ human studies, increases cytokine production and inhibits production of regulatory T cells and checkpoint molecules, all of which are known to be important in cancer, in autoimmune disease, such as multiple sclerosis, and in organ transplantation.

~~Antibody Platform.~~ ~~Our proprietary~~GPR174. In ex vivo ~~platform~~human studies, our small-molecule inhibitors targeting GPR174 upregulate the production of cytokines (e.g., IL-2, interferon-γ), block multiple checkpoint inhibitors (e.g., PDL-1, CTLA-4, LAG‑3) and tumor promoters (e.g., amphiregulin), and suppress regulatory T-cells (Tregs). Based on our data, we believe that GPR174 controls a major pathway in cancer and modulation of the receptor could provide a seminal advance in immuno-oncologic treatments for a wide range of solid and liquid tumors. We continue to focus on GPR174 and several other of our GPCR targets with the ~~discovery~~objective of novel, high-affinity monoclonal antibodies, which was in-licensed from the University of Washington and then further developed by our scientists, utilizes a chicken B-cell lymphoma cell line. Using our platform and other know-how and techniques, we have generated antibodies to several clinically significant targets, including highly potent antibodies against MASP-3 and MASP-1.moving compounds targeting them into human trials as rapidly as possible.

Financial Summary

~~During~~For the three months ended ~~September 30,~~March 31, 2019 and 2018, we recognized net losses of $24.3 million and ~~2017,~~$30.1 million, respectively, and our OMIDRIA revenues were ~~$4.6~~$21.8 million and ~~$21.7~~$1.6 million, respectively, ~~and our net losses were $39.5 million (including $5.0 million of non-cash expenses) and $7.5 million (including $4.2 million of non-cash expenses)~~ for the same periods. ~~The significant reduction in OMIDRIA revenues between~~During the ~~periods is due to the expiration of separate Medicare reimbursement for OMIDRIA on~~period from January 1, 2018 ~~which~~to September 30, 2018, OMIDRIA was ~~reinstated on~~not reimbursed separately when used for procedures involving patients covered by Medicare Part B. Separate reimbursement payment for OMIDRIA was restored effective October 1, 2018 through September 30, 2020 as a result of securing a two-year extension of pass-through reimbursement status for ~~a two-year-period pursuant to the Appropriations Act.~~use of OMIDRIA during procedures performed on Medicare Part B fee-for-service patients. See ~~“Results of Operations~~“Commercial Product - ~~Revenue” below~~OMIDRIA” earlier in this section for additional ~~details.~~ details regarding the pass-through reimbursement status for OMIDRIA.

* Fiscal quarters without pass-through reimbursement.

We expect ~~that~~ our net losses will continue until ~~such time as~~ we derive sufficient revenues from sales of OMIDRIA and/or other sources, such as licensing, product sales and other revenues from our product candidates, that are sufficient to cover our ~~expenses.~~operating expenses, capital expenditures and debt service obligations.

As of ~~September 30, 2018~~,March 31, 2019, we had ~~$55.2~~$47.2 million in cash and cash equivalents and short-term investments available for general corporate ~~use. In addition, we had restricted investments of $5.8~~use and $24.7 million ~~that we were required to maintain~~ in ~~depository and investment~~ accounts primarily pursuant to our Term Loan Agreement, or the CRG Loan Agreement, with CRG Servicing LLC, or CRG, as administrative and collateral agent, and the lenders identified therein, which requires us to maintain a balance of cash and cash equivalents of $5.0 million, and our lease related to the Omeros Building.receivable, net.

Results of Operations

Revenue

On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09 (Topic 606) “Revenue from Contracts with Customers” using the modified retrospective transition method. The adoption of ASU 2014-09 did not change the timing or the amounts of our previously recognized revenue. For more information regarding revenue recognition, see Part I, Item 1, Note 1 - “Organization and Significant Accounting Policies.”

Our revenue consists of OMIDRIA product sales to ambulatory surgery centers, or ASCs, and hospitals in the ~~following:~~U.S. Our product sales, net are as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2018
2017 2018 2017
(In thousands) (In thousands)
Product sales, net $ 4,608
$ 21,658
$ 7,852
$ 51,067

~~Pass-through status for OMIDRIA allows for separate reimbursement payment (i.e.~~, outside the packaged procedural payment) to ASCs and hospitals using OMIDRIA in procedures involving patients covered by Medicare Part B. CMS originally granted transitional pass-through reimbursement status for OMIDRIA through December 31, 2017. For the period January 1, 2018 through September 30, 2018, OMIDRIA was not subject to pass-through reimbursement payment for procedures involving patients covered by Medicare Part B and, therefore, was not subject to separate reimbursement for procedures involving these patients. In March 2018, the Appropriations Act was signed into law, which among other things extended pass-through reimbursement status for certain drugs, including OMIDRIA, for a two-year period beginning October 1, 2018. CMS has since implemented the Appropriations Act for dates of service beginning October 1, 2018. In the recently released 2019 final rule for CMS’ OPPS, CMS indicated that it will separately pay in the ASC setting for non-opioid drugs used during surgery that have an FDA-approved indication for postoperative pain relief and are currently packaged in calendar year 2019. Although OMIDRIA is not specifically named because it currently is paid separately, we believe that OMIDRIA meets this definition. The preamble to this section of the OPPS Final Rule states that CMS will apply the exclusion from packaged payment to other drugs in the future if they meet the criteria. The OPPS Final Rule also indicates that CMS will consider in future rule-making a policy that pays separately for drugs used during cataract surgery that have an FDA-approved indication to address postoperative issues. We believe that OMIDRIA also meets this definition. We are continuing to confirm these and to pursue other avenues of permanent separate payment or similar reimbursement for OMIDRIA beyond September 30, 2020 but can provide no assurance that these efforts will be successful.



	Three Months Ended March 31,
	2019		2018
	(In thousands)
Product sales, net	$	21,779	$	1,588

During the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, OMIDRIA revenue was ~~$4.6 million and $7.9~~$21.8 million as compared to ~~$21.7 million and $51.1~~$1.6 million for the three ~~and nine~~ months ended ~~September 30, 2017.~~March 31, 2018. The ~~decrease~~increase in revenue during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 compared to the same ~~periods~~period in prior year was due to ~~the~~ significantly ~~reduced usage of~~increased demand for OMIDRIA by ASCs and hospitals following the ~~expiration~~reinstatement of transitional pass-through reimbursement status for OMIDRIA on ~~January 1, 2018.~~

During the last two weeks of September 2018, we saw increased purchases from our wholesalers in anticipation of renewed buying from our ASC and hospital customers as a result of the reinstatement of pass-through reimbursement of OMIDRIA on October 1, 2018. In addition, in the third quarter of 2018, we recognized $2.1 million of net revenue related to inventory at the wholesalers. We previously deferred this amount due to reduced demand from ASCs and hospitals as a result of the loss of pass-through reimbursement and we recognized this amount in the third quarter due to the anticipated increase in ASC and hospital demand following the reinstatement of pass-through reimbursement effective October 1, 2018.

InWe anticipate that OMIDRIA product sales, net, will continue to increase during 2019 but we are unable to predict with precision the ~~last week~~magnitude of ~~September and for October 2018, we saw OMIDRIA sales from our wholesalers to our ASC and hospital customers (sell-through) increase significantly as compared~~those increases at the current time due to the ~~first three quarters of 2018 as ASCs and hospitals began to restock OMIDRIA prior to the~~recent reinstatement of pass-through ~~reimbursement~~status for OMIDRIA, which became effective October 1, 2018. We cannot yet predict how quickly or the full extent to which ASCs and hospitals will resume or increase their usage of OMIDRIA, but in October 2018, our ASC and hospital customers purchased approximately 17,500 units of OMIDRIA from our wholesalers. Sell-through in October 2018 was 81% of sell-through in October 2017, which was our highest month of OMIDRIA sell-through to date.

OMIDRIA.

Gross-to-Net Deductions

We record OMIDRIA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provision for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 was ~~28.7% and 27.2%, respectively,~~27.0% of gross OMIDRIA product sales. This compares to ~~24.7% and 24.2%~~28.9% for the ~~corresponding periods in 2017.~~three months ended March 31, 2018. The primary reason for the higher gross-to-net deduction percentages in the first three quarters of 2018 is the increase in chargebacks due to a higher percentage of our product sales being eligible for government-mandated discounts. In addition, we had an increase in the percentage of our sales subject to patient co-pay assistance payments under our OMIDRIAssure Reimbursement Services Program during this same period. These increases were partially offset by a decrease in ~~rebates related to our volume discount program with ASCs during this period.~~

~~We expect that our fourth quarter provision for~~ gross-to-net deductions as a percentage of sales is due to reduced chargebacks partially offset by increased rebates under our volume-purchase discount program. We expect our gross-to net deductions will ~~be comparable to that for~~increase slightly from the ~~third quarter~~three months ended March 31, 2019 during the remainder of ~~2018.~~2019.

A summary of our gross-to-net related accruals for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 is as follows:


	Chargebacks and Rebates			Distribution Fees and Product Return Allowances			Total			Chargebacks and Rebates			Distribution Fees and Product Return Allowances			Total
	(In thousands)									(In thousands)
Balance as of December 31, 2017	$	5,724		$	3,373		$	9,097
Balance as of December 31, 2018										$	7,015		$	1,485		$	8,500
Provisions	2,541			386			2,927			6,828			1,246			8,074
Payments	(7,087		)	(2,847		)	(9,934		)	(6,903		)	(1,119		)	(8,022		)
Balance as of September 30, 2018	$	1,178		$	912		$	2,090
Balance as of March 31, 2019										$	6,940		$	1,612		$	8,552

Chargebacks and Rebates

We record a provision for estimated chargebacks and rebates at the time we recognize OMIDRIA product sales revenue and reduce the accrual when payments are made or credits are granted. Our chargebacks are related to a ~~Pharmaceutical Pricing Agreement,~~pharmaceutical pricing agreement, a Federal ~~Supply Schedule~~supply schedule agreement, a 340B prime vendor agreement and a Medicaid ~~Drug Rebate Agreement.~~drug rebate agreement. We also record a provision for estimated ~~payments under~~rebates for our OMIDRIAssure ~~Reimbursement Services Program~~^®patient assistance and reimbursement services program and our rebates under our purchase ~~volume discount~~volume-discount programs.

Distribution Fees and Product Return Allowances

We pay our wholesalers a distribution fee for services they perform for us based on the dollar value of their purchases of OMIDRIA. We record a provision for these charges as a reduction to revenue at the time of sale to the wholesaler and make payments to our wholesalers based on contractual terms.

We allow for the return of product up to 12 months past its expiration date, or for product that is damaged or not used by our customers. We record a provision for returns upon sale of OMIDRIA to our wholesaler. When a return or claim is received, we issue a credit memo to the wholesaler against its outstanding receivable to us or we reimburse the customer.

Research and Development Expenses

Our research and development expenses can be divided into three categories: direct external expenses, which include clinical research and development and preclinical research and development activities; internal, overhead and other expenses; and stock-based compensation expense. Direct external expenses consist primarily of expenses incurred pursuant to agreements with third-party manufacturing organizations, contract research organizations, or CROs, clinical trial sites, collaborators, ~~licensors and~~ consultants, and lab supplies. Costs are reported in preclinical research and development until the program enters the clinic. Internal, overhead and other expenses consist of personnel costs, overhead costs such as rent, utilities and depreciation and other miscellaneous costs. We do not generally allocate our internal resources, employees and infrastructure to any individual research project because we deploy them across multiple clinical and preclinical projects that we are advancing in parallel.

The following table illustrates our expenses associated with these activities:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019			2018
	(In thousands)				(In thousands)				(In thousands)
Direct external expenses:
Clinical research and development:
MASP-2 Program - OMS721	$	15,660	$	6,480	$	31,904	$	13,935
MASP-2 Program - OMS721 (narsoplimab)									$	14,437		$	7,929
OMIDRIA - Ophthalmology	511		436		1,795		2,848		708			609
PDE7 - OMS527	1,206		—		1,206		—		991			—
Other clinical programs	253		22		915		111		375			210
Total clinical research and development	17,630		6,938		35,820		16,894		16,511			8,748
Preclinical research and development	1,203		1,438		5,640		3,011		726			1,632
Total direct external expenses	18,833		8,376		41,460		19,905		17,237		��	10,380

Internal, overhead and other expenses	6,695		5,162		19,234		16,273		7,524			6,560
Stock-based compensation expense	1,334		1,297		3,720		4,034		1,494			1,200
Total research and development expenses	$	26,862	$	14,835	$	64,414	$	40,212	$	26,255		$	18,140

The ~~$10.5~~$6.9 million ~~and $21.6 million increases~~increase in direct external expenses for the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, compared to the same ~~periods~~period in ~~2017, were~~2018, was due primarily to higher third-party manufacturing scale-up costs ~~including the acquisition of raw manufacturing materials to be used over approximately two years~~ for our ~~OMS721~~narsoplimab program as we continue to increase our production capacity to meet anticipated clinical and commercial requirements, ~~higher~~and the inclusion of clinical costs associated with ~~initiating our OMS721 IgA nephropathy Phase 3 clinical trial and~~ the ~~July 2018~~ initiation of ~~our~~a Phase 1 clinical trial infor OMS527, our PDE7 program for addiction and compulsive disorders. ~~In addition, we also incurred higher third-party~~The decline in direct external expenses related to our preclinical development ~~expenses in~~expense reflects the ~~first half~~advancement of ~~2018 as we advanced~~ OMS527 into ~~the clinic~~clinical research and ~~as we continued preclinical~~ development while maintaining similar level of expenditures related to our ~~MASP-2 small-molecule inhibitors, OMS906 and our GPCR~~pre-clinical programs. ~~These increases were partially offset by decreased costs due to completing the transfer of OMIDRIA manufacturing to a new facility in December 2017.~~

The ~~changes~~increases in internal, overhead and other expenses are primarily due to increased ~~employee~~employee-related costs to support our increased research and development activities.

The majority of our research and development expenses for the remainder of 2019 are anticipated to be related ~~costs.~~

~~For the fourth quarter of 2018, we~~to our narsoplimab program. We expect ~~our overall~~ research and development costs to ~~will likely~~ increase ~~given our continuing manufacturing efforts for OMS721,~~throughout 2019 as we continue our Phase 3 clinical programs for ~~OMS721~~narsoplimab and incur manufacturing scale-up costs and other expenses as we continue preparations for the anticipated submission of marketing applications for narsoplimab in HSCT-TMA and the potential commercialization of narsoplimab in HSCT-TMA in the U.S. and Europe. However, we expect that certain expenses will be variable depending on the timing of manufacturing batches, clinical trial activities and regulatory review of our ~~ongoing Phase 1 OMS527 trial.~~product candidates and programs.

At this time, we are unable to estimate with ~~any~~ certainty the longer-term costs we will incur in the continued development of our product candidates due to the inherently unpredictable nature of our preclinical and clinical development activities. Clinical development timelines, the probability of success and development costs can differ materially as new data become available and as expectations change. ~~While we are focused currently on advancing our product development programs, our~~Our future research and development expenses will depend, in part, on the preclinical or clinical success of each product candidate as well as ongoing assessments of each program’s commercial potential. In addition, we cannot forecast with ~~any degree of certainty~~precision which product candidates, if any, may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

We are required to expend substantial resources in the development of our product candidates due to the lengthy process of completing clinical trials and seeking regulatory approval. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could delay our generation of product revenue and increase our research and development expenses and, in turn, could have a material adverse effect on our operations, financial condition and liquidity. Because of the factors above, we are not able to estimate with any certainty when or if we would recognize any net cash inflows from our research and development projects.

expenses.

Selling, General and Administrative Expenses


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
	(In thousands)				(In thousands)				(In thousands)
Selling, general and administrative expenses, excluding stock-based compensation expense	$	11,557	$	10,005	$	31,654	$	34,601	$	12,752	$	9,168
Stock-based compensation expense	1,595		1,744		5,176		5,415		1,880		1,766
Total selling, general and administrative expenses	$	13,152	$	11,749	$	36,830	$	40,016	$	14,632	$	10,934

The increase in selling, general and administrative expenses during the three months ended September 30, 2018 compared to the same periods in 2017 was primarily due increased costs associated with the OMIDRIA sales force expansion and preparation for the reinitiation of pass-through payment status for OMIDRIA. Pre-commercialization activities associated with OMS721 also contributed to the increase. These increases were partially offset by decreased legal costs associated with the conclusion of our patent infringement lawsuit against Par, which was resolved in October 2017.

~~The decrease in selling, general and administrative expenses during the nine months ended September 30, 2018~~March 31, 2019 compared to the same period in ~~2017~~2018 was primarily due to ~~reduced legal~~increased pre-commercialization activities for narsoplimab, sales and marketing costs ~~associated with~~related to the ~~Par lawsuit.~~re-introduction of OMIDRIA, fees related to patent applications, consulting and professional service fees, and employee-related costs. The change in stock-based compensation is primarily due to timing of employee stock grants.

We expect that our selling, general and administrative expenses will increase slightly in the ~~fourth quarter could slightly increase from~~remaining quarters of 2019 compared to current levels, due to a full quarter of costs associated with the expansion of our OMIDRIA field sales force, increased marketing activities following the October 1, 2018 reinstatement of OMIDRIA pass-through payment status, and early pre-commercialization activities of OMS721.

~~The changes in stock-based compensation expense during the three and nine months ended September 30, 2018 compared to the same periods in the prior year were~~ primarily due to ~~timing and fair value of new employee option grants.~~increased pre-commercialization activities for narsoplimab.

Interest Expense

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
(In thousands) (In thousands)
Interest expense $ 4,602
$ 2,780
$ 11,104
$ 8,166



	Three Months Ended March 31,
	2019		2018
	(In thousands)
Interest expense	$	5,600	$	2,825

The increase in interest expense during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 compared to the same periods in the prior year was primarily due to the ~~May~~issuance, in November 2018, ~~borrowing~~ of $210.0 million aggregate principal amount of our 6.25% Convertible Senior Notes due 2023, or the ~~remaining $45.0~~Convertible Notes. Non-cash interest expense for the three months ended March 31, 2019 and 2018 was $2.2 million ~~available to us under~~and $1.1 million, respectively. For more information regarding our Convertible Notes, see Part II, Item 8, “Note 8 — Convertible Senior Notes” in our Annual Report on Form 10-K for the ~~CRG Loan Agreement and deferred interest being added to the outstanding balance under our CRG Loan Agreement.~~year ended December 31, 2018.

Financial Condition - Liquidity and Capital Resources

~~We have~~For the three months ended March 31, 2019, we generated net losses of ~~$39.5~~$24.3 million ~~and $103.2 million for the three and nine months ended September 30, 2018, respectively~~ and incurred negative cash flows ~~for~~from operations of ~~($36.9~~$12.9 million compared to $30.1 million and ~~$79.1~~$11.3 million, respectively, for the three ~~and nine~~ months ended ~~September 30, 2018).~~March 31, 2018. As of ~~September 30, 2018~~March 31, 2019, we had $~~55.2~~47.2 million in cash, cash equivalents and short-term investments available for general corporate use that are held principally in money-market accounts as compared to ~~$83.7~~$60.5 million at December 31, ~~2017.~~2018. Our accounts receivable balance at ~~September 30, 2018~~March 31, 2019 was ~~$2.3~~$24.7 million ~~compared to $17.1 million at December 31, 2017 due to significantly reduced 2018 revenues for OMIDRIA because of the temporary loss of pass-through reimbursement effective January 1, 2018. We also~~and we had ~~$24.6~~$44.5 million of current liabilities outstanding at March 31, 2019.

As described earlier in this section under “Commercial Product — OMIDRIA”, pass-through status for OMIDRIA allows for separate reimbursement payment (i.e., outside the packaged procedural payment) to ASCs and hospitals using OMIDRIA in procedures involving patients covered by Medicare Part B. OMIDRIA has been granted pass-through reimbursement through September 30, ~~2018.~~2020.

~~Our notes payable~~We continue to advance a series of clinical and ~~lease financing obligation increased~~preclinical programs (including three programs currently in Phase 3). We believe OMIDRIA sales will continue to ~~$132.3 million as~~grow in 2019; however, we cannot predict with precision the extent of ~~September 30, 2018, compared~~growth in OMIDRIA revenues in 2019. As a result, despite the significant quarterly revenue growth in OMIDRIA sales prior to ~~$84.6 million as~~the loss of OMIDRIA pass-through reimbursement December 31, 2017, primarily due to borrowing the remaining $45.0 million available to us under the CRG Loan Agreement and the deferral of $3.2 million of interest payments also under the CRG Loan Agreement. For more information regarding the CRG Loan Agreement, see Part I, Item 1, Note 6 - “Notes Payable and Lease Financing Obligations.”

~~The significant reduction~~meaningful growth in OMIDRIA ~~usage from January 1, 2018 to September 30, 2018 had a negative impact on our cash flows for the first three quarters of 2018 as~~ sales for OMIDRIA decreased significantly during this period. OMIDRIA revenues for October 2018, following the reinstatement of pass-through reimbursement, have increased substantially from the run rate we experiencedin 2019 and beyond, are not included in the ~~first three quarters~~determination regarding our prospects as a going concern. Similarly, we are unable to include in the determination any proceeds from debt transactions or other financing instruments despite our successful track record in accessing capital through these avenues. We also have not included any potential partnerships related to our products or product candidates. The conditions described above when evaluated within the constraints of the ~~year.~~ accounting literature raise substantial doubt with respect to our ability to meet our obligations through May 9, 2020 and, therefore, to continue as a going concern.

We ~~expect the run rate will continue to increase, but we cannot predict how quickly or the extent to which ASCs and hospitals will resume or increase their usage of OMIDRIA.~~

~~We expect~~plan to continue to ~~incur negative cash flows until OMIDRIA product~~fund our operations through proceeds from sales of OMIDRIA. Should it be necessary or determined to be strategically advantageous, we also could pursue debt financings, public and private offerings of our equity securities similar to those we have completed previously, and/or other strategic transactions, which may include licensing a portion of our existing technology. If these capital sources, for any reason, are needed but inaccessible, it would have a significantly negative effect on our financial condition. Should it be necessary to manage our operating expenses, we would reduce our projected cash requirements through reduction of ~~revenue (e.g., corporate partnering, licensing or product sales) generate sufficient cash inflows to finance~~ our ~~operations~~expenses by delaying clinical trials, reducing selected research and ~~debt service requirements. Until we are cash-flow positive, we will need to continue to raise operating funds through the issuance of public or private equity securities, incurring additional debt~~development efforts, and/or ~~pursuing partnering~~implementing other restructuring activities.

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and ~~licensing opportunities.~~

~~On an interim~~the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and ~~annual basis, we are required~~classification of assets or the amounts and classification of liabilities that may result from uncertainty related to ~~assess~~ our ability to continue as a going concern for one year after the date the financial statements are issued using rules defined by Accounting Standard Codification (ASC) No. 205-40 - Going Concern, or the Standard. In performing the assessment, we are required to evaluate whether our plans to mitigate the conditions above alleviate the substantial doubt about our ability to meet our obligations as they become due within one year after the date the financial statements are issued. In performing this assessment, we are limited to the restrictions and definitions in the Standard. As such, we did not consider any future sources of working capital that we may otherwise be able to access, including significant growth in revenues from the sale of OMIDRIA experienced in October 2018. Consequently, based on the assessment we performed using the associated limitations required by the Standard, we have concluded that there is substantial doubt about our ability to continue as a going concern through November 8, 2019.concern.

Cash Flow Data


	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018
	(In thousands)						(In thousands)
Selected cash flow data
Cash provided by (used in):
Operating activities	$	(79,080	)	$	(32,055	)	$	(12,948	)	$	(11,296	)
Investing activities	27,512			(43,030		)	11,287			8,547
Financing activities	50,961			73,887			(146		)	544

Operating Activities. Net cash used in operating activities for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 increased by ~~$47.0~~$1.7 million as compared to the same period in ~~2017.~~2018. The net increase in cash used in operating activities in the current period compared to the prior year ~~largely~~ resulted from ~~an increase in our net loss of $66.3 million and~~ a ~~$10.3~~$18.9 million decrease in funds provided byfrom to the collection of accounts ~~payable, accrued expenses~~

receivable, and ~~other.~~a $0.8 million used in the acquisition of OMIDRIA inventory. This increase in cash used in operating activities was ~~partially~~mostly offset by a ~~$27.4~~$5.7 million decrease in our net loss, a $3.0 million decrease in funds used for advance payments, and a $7.7 million increase in funds provided ~~due to the collection of~~by accounts receivable that existed as of December 31, 2017 that were minimally replaced in 2018 because of the significantly reduced OMIDRIA sales related to the loss of pass-through reimbursement from January 1, 2018 to September 30, 2018.payable and accrued expenses.

Investing Activities. Cash flows from investing activities primarily reflect cash used to purchase short-term investments and proceeds from the sale of short-term investments, thus causing a shift between our cash and cash equivalents and short-term investment balances. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider these fluctuations in cash flows to be important to the understanding of our liquidity and capital resources.

Net cash provided by investing activities during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~$27.5~~$11.3 million, a change of ~~$70.5~~approximately $2.7 million from the ~~$43.0~~$8.5 million net cash ~~used in~~provided by investing activities for the same period in 2017. The primary differences between the periods is that in the nine months ended September 30, 2018, we used the $44.6 million we received under the CRG Loan Agreement in May 2018 to purchase investments. In addition, investments2018. Investments sold increased by ~~$51.1~~$2.8 million during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared to the same period in ~~2017 in order~~2018 to provide cash to fund our ~~operations due to the increase in our net loss.~~operations.

Financing Activities. Net cash ~~provided by~~used in financing activities during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~$51.0~~$0.1 million, a decrease of ~~$22.9~~$0.7 million compared to the same period in ~~2017.~~2018. The decrease in net cash provided by financing activities for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was primarily due to ~~the $63.6 million~~ ~~received from common stock offering in August 2017 offset by the $44.6 million incremental borrowing in May 2018 under our CRG Loan Agreement. In~~

~~addition, during the nine months ended September 30, 2018,~~a decrease of proceeds from the exercise of stock ~~option~~options and ~~warrants decreased by $3.8 million compared to the prior year period.~~

~~Loan and Security Agreement~~

In October 2016, we entered into the CRG Loan Agreement, pursuant to which we pledged substantially all of our assets, including intellectual property, as collateral. In May 2018, we borrowed the remaining $45.0 million available under the CRG Loan Agreement, and as of September 30, 2018, $132.1 million was outstanding. For more information regarding the CRG Loan Agreement, see Part I, Item 1, Note 6 - “Notes Payable and Lease Financing Obligations.”an increase in principal payments on finance leases.

Contractual Obligations and Commitments

Our future minimum contractual commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, ~~2017 that was filed with the Securities and Exchange Commission (SEC) on March 1,~~ 2018. Other than the following, our future minimum contractual obligations and commitments have not changed materially from the amounts previously reported.

Goods & Services

We have certain non-cancelable obligations under various other agreements for the ~~acquisitions~~acquisition of goods and services associated with the manufacturing of our product candidates that contain firm commitments. As of ~~September 30, 2018,~~March 31, 2019, our aggregate firm commitments are ~~$11.5~~$13.7 million.

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

Lease Agreements

We have operating leases related to our office and laboratory space in The Omeros Building. The initial term of the leases is through November 2027 and we have two options to extend the lease term, each by five years. We have finance leases for certain laboratory and office equipment that have lease terms expiring through December 2021. On January 1, 2019, we adopted Topic 842. The adoption did not change our contractual obligations related to lease agreements. See Part I, Item 1, Note 7 - “Lease Liabilities” for the maturities of our lease liabilities as of March 31, 2019.

Critical Accounting Policies and Significant Judgments and Estimates

~~The preparation of~~There have not been any material changes in our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances; however, actual results could differ from those estimates. An accounting policy is considered critical if it is important to a company’s financial condition and results of operations and if it requires the exercise of significant judgment and the use of estimates on the part of management in its application. Although we believe that our judgments and estimates are appropriate, actual results may differ materially from our estimates.

~~We believe the judgments, estimates and assumptions associated with the following critical accounting policies have the greatest potential impact on our condensed consolidated financial statements:~~

~~Revenue recognition;~~

~~Research and development expenses, primarily clinical trial expenses and manufacturing of drug product and clinical drug supply; and~~

~~Stock-based compensation.~~

~~For a detailed discussion of these~~ critical accounting policies and significant judgments and estimates ~~refer to “Critical Accounting Policies and Significant Judgments and Estimates” within “Item~~as disclosed in Part II, Item 7, ~~- Management's~~“Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2017 that was filed with the SEC on March 1, 2018. There have not been any material changes in our critical accounting policies and significant judgments and estimates as disclosed in our Annual Report on Form 10-K2018, except for the ~~year ended December 31, 2017.~~adoption ASU 2016-02, Leases. See Note 1 -“Organization and Significant Accounting Policies” and Note 7 - “Lease Liabilities” in this Form 10-Q for additional information about our adoption of ASU 2016-02 - Leases.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is primarily confined to our investment securities and notes payable. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in high-credit-quality securities. As of ~~September 30, 2018~~March 31, 2019, we had cash, cash equivalents and short-term investments of ~~$55.2~~$47.2 million. In accordance with our investment policy, we invest funds in highly liquid, investment-grade securities. These securities in our investment portfolio are not leveraged and are classified as available-for-sale. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have a material negative impact on the realized value of our investment portfolio. We actively monitor changes in interest rates and, with our current portfolio of short-term investments, we are not exposed to potential loss due to changes in interest rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of ~~September 30, 2018~~March 31, 2019. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of ~~September 30, 2018~~March 31, 2019, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) under the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~In May 2017, we received Notice Letters from Sandoz and Lupin that each had filed an ANDA containing a Paragraph IV Certification under the Hatch-Waxman Act seeking approval from the FDA~~

From time to ~~market a generic version of OMIDRIA prior to the expiration of six Orange Book-listed patents covering OMIDRIA. On June 21, 2017, we filed a patent infringement lawsuit~~time, in the ~~U.S. District Court for the District~~ordinary course of ~~Delaware against Sandoz~~business, we may be involved in various claims, lawsuits and on June 22, 2017 we filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Lupin. The Delaware lawsuits against Sandoz and Lupin were consolidated for all purposes by court order entered on October 16, 2017. The lawsuits were filed under the Hatch-Waxman Act for Sandoz’s and Lupin’s respective infringement of six Omeros patents: U.S. Patent Nos. 8,173,707, 8,586,633, 9,066,856, 9,278,101, 9,399,040 and 9,486,406, which relate to OMIDRIA and are listed in the Orange Book. A seventh patent related to OMIDRIA, U.S. Patent 9,855,246, was issued to Omeros on January 2, 2018, was then listed in the Orange Book for OMIDRIA on January 9, 2018, and both lawsuits were subsequently amended to assert this additional patent.

other proceedings. As previously disclosed, we entered into a settlement agreement and consent judgment with Lupin on May 22, 2018. On July 24, 2018, following Sandoz’s amendment of its ANDA to revise its Patent and Exclusivity Certification from a Paragraph IV certification to a Paragraph III certification, we and Sandoz filed in the U.S. District Court for the District of Delaware a stipulation to dismiss without prejudice our lawsuit against Sandoz. Sandoz’s amendment of its ANDA to include a Paragraph III certification means that the FDA cannot approve the ANDA until after the July 2033 expiry of the ~~Orange Book-listed patents. In the stipulated dismissal, which was entered by the court~~date of filing of this Quarterly Report on ~~July 25, 2018, Sandoz stipulated and agreed that it was no longer seeking approval of its ANDA until after the expiration of the patents that have been listed~~Form 10-Q, we were not involved in ~~the Orange Book for OMIDRIA.~~

As a result of the Sandoz dismissal, as well as prior settlement agreements with Par and Lupin, all of our litigation with ANDA filers has been concluded. Based on these outcomes, the earliest ANDA entry date for any ~~of the three generic manufacturers is April 2032 unless otherwise subsequently authorized pursuant to the settlement agreements.~~material legal proceedings.

ITEM 1A. RISK FACTORS

~~The~~

We operate in an environment that involves a number of risks and ~~uncertainties~~uncertainties. Before making an investment decision you should carefully consider the risks described ~~below may have a material adverse effect~~in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 1, 2019. In assessing the risk factors set forth in our ~~business, prospects, financial condition or operating results.~~Annual Report on Form 10-K for the year ended December 31, 2018, you should also refer to the other information included therein and in this Quarterly Report on Form 10-Q. In addition, we may be adversely affected by risks that we currently deem immaterial or by other risks that are not currently known to us. ~~You should carefully consider these risks before making an investment decision.~~ The trading price of our common stock could decline due to any of these risks and you may lose all or part of your investment. ~~In assessing the risks described below, you should also refer~~

There has not been a material change to the ~~other information contained in this Quarterly Report on Form 10-Q and~~risk factors as set forth in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~

~~Risks Related to Our Products, Programs and Operations~~

Our ability to achieve profitability is dependent on the commercial success of OMIDRIA. To the extent OMIDRIA is not successful, our business, financial condition and results of operations may be materially adversely affected, and the price of our common stock may decline.

OMIDRIA is our only product that has been approved by the FDA for commercial sale in the U.S. For the three months ended September 30, 2018, we recorded net sales of OMIDRIA of $4.6 million. We have not generated revenue from sales of OMIDRIA to date that is sufficient to fund fully our operations and cannot provide assurance that we will generate sufficient revenue from OMIDRIA in the future to fund fully our operations. We will need to generate substantially more product revenue from OMIDRIA to achieve and sustain profitability. Our ability to generate significant revenue from OMIDRIA product sales depends on our ability to achieve increased market acceptance of, and to otherwise market and sell effectively, OMIDRIA, which may not occur for a number of reasons, including:

pricing, coverage and reimbursement policies of government and private payers such as Medicare, Medicaid, the U.S. Department of Veterans Affairs, group purchasing organizations, insurance companies, health maintenance organizations and other plan administrators;

~~a lack of acceptance by physicians, patients and other members of the healthcare community;~~

~~the availability, relative price and efficacy of the product as compared to alternative treatment options or branded, compounded or generic competing products;~~

~~an unknown safety risk;~~2018.

~~the failure to enter into and maintain acceptable partnering arrangements for marketing and distribution of OMIDRIA outside of the U.S.;~~

~~changed or increased regulatory restrictions in the U.S., EU and/or other foreign territories; and~~

~~a lack of adequate financial or other resources.~~

The scheduled expiration of pass-through reimbursement status for OMIDRIA under Medicare Part B on January 1, 2018 adversely affected our revenues, and following the October 1, 2018 reinstatement of pass-through reimbursement, we cannot definitively project when or to what extent OMIDRIA sales will recover or increase beyond 2017 levels.

Effective January 1, 2018, as scheduled, OMIDRIA no longer was eligible for separate payment under Medicare Part B. Consequently, from January 1, 2018 through September 30, 2018, ASCs and hospitals received from CMS the same procedural payment whether or not OMIDRIA was used for the procedure. Due to this scheduled expiration of transitional pass-through payment status, we saw a significant reduction in ASC and hospital demand for OMIDRIA beginning in December 2017 and a corresponding decrease in sales to our wholesalers that continued into the third quarter of 2018, with OMIDRIA sales during this period having been substantially reduced. Pass-through reimbursement status for OMIDRIA resumed on October 1, 2018 for a two-year period, consistent with the statutory changes included in the Appropriations Act, and we are experiencing early sales growth, but we cannot definitively project when or to what extent ASCs or hospitals will resume use of OMIDRIA. Some ASCs and/or hospitals that used OMIDRIA prior to the transitional pass-through expiration could decide not to resume using OMIDRIA after October 1, 2018, which would inhibit or limit our potential sales growth.

We continue to confirm and seek permanent separate or similar reimbursement for OMIDRIA. However, this requires action from legislative and/or administrative authorities and, consequently, we cannot guarantee that any such action will be taken or, if taken, when such action will be effective, nor can we predict the actual reimbursement rate. In addition, we can provide no assurances that separate reimbursement for OMIDRIA will continue to be available on or after October 1, 2020, or if available, that the resulting reimbursement payment rates will be adequate.

Any of these risks, if realized, would adversely affect our ability to generate revenue and attain profitability and there could be a material adverse effect on our financial condition, results of operations and growth prospects and the trading price of our stock could decline.

If OMIDRIA or any other product that we develop and commercialize does not receive adequate coverage or reimbursement from governments or private payers, or if we do not establish and maintain market-acceptable pricing for OMIDRIA or those potential other commercialized products, our prospects for revenue and profitability would suffer.

Our revenues and profitability depend heavily on the pricing, availability and duration of adequate coverage or reimbursement for the use of products that we or our third-party business partners commercialize, including OMIDRIA, from government, private and other third-party payers, both in the U.S. and in other countries. Any product that we bring to market may not be considered cost-effective and/or the amount reimbursed for any product may be insufficient to allow us to sell the product profitably. Obtaining coverage and reimbursement for any product from each government or third-party payer can be a time-consuming and costly process that may require expansion of staff and/or increased use of third parties and could require us to provide additional supporting scientific, clinical and cost-effectiveness data for the use of our approved products to each payer. We can provide no assurances at this time regarding the cost-effectiveness of OMIDRIA or any of our product candidates. Further, we can provide no assurance that the amounts, if any, reimbursed to surgical facilities for utilization of any of our surgery-related products, including OMIDRIA or any of our product candidates, or to surgeons for the administration and delivery of these products or product candidates will be considered adequate to justify the use of these products or product candidates. In addition, obtaining acceptable coverage and reimbursement from one payer does not guarantee that we will obtain similar acceptable coverage or reimbursement from another payer.

There may be significant delays in obtaining coverage or reimbursement for newly approved products, and we may not be able to provide data sufficient to be granted adequate coverage or reimbursement. Even when a payer determines that a product is eligible for reimbursement, coverage may be limited to the uses of a product that are either approved by the FDA (or, in other countries, the relevant country’s regulatory agency) and/or appear in a recognized drug compendium, and other conditions may apply. Moreover, eligibility for coverage does not mean that any product will be reimbursed at a rate that allows us to make a profit in all cases or at a rate that covers our costs, including research, development, manufacturing, sales and distribution. Increasingly, government and private third-party payers that reimburse for healthcare services and products are requiring that companies provide them with predetermined discounts from list prices and challenging the prices charged for medical products, which could adversely impact the pricing of our products. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. Pricing may also be adversely affected by changes in the terms, scope and/or complexity of government pricing requirements. Even if we achieve coverage or

reimbursement for a product, the initial rate or method at which the product will be reimbursed could become unfavorable to us at the time reimbursement is initiated or in the future or may be of a limited duration.

In non-U.S. jurisdictions, we must obtain separate reimbursement approvals and comply with related foreign legal and regulatory requirements. In some countries, including those in the EU, our products may be subject to government price controls. Pricing negotiations with governmental authorities can take a considerable amount of time and expenditure of resources after the receipt of marketing approval for a product. We provide no assurances that the price of any product in one or more of these countries or regions will allow us to make a profit or cover our costs, including research, development, manufacturing, sales and distribution, and as a result we may decide to delay, potentially indefinitely, initiating sales in the particular country or region.

If the reimbursement or pricing that we are able to obtain and maintain for any product that we develop and commercialize, including OMIDRIA, is inadequate, is significantly delayed or is subject to overly restrictive conditions, our ability to generate revenue, attain profitability and/or commercialize our product candidates may be impaired and there could be a material adverse effect on our business, financial condition, results of operations and growth prospects and the trading price of our stock could decline.

~~Our operating results are unpredictable and may fluctuate.~~

Our operating results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. We believe that our quarterly and annual results of operations may be affected by a variety of factors, including:

~~the level and timing of commercial sales of OMIDRIA, as well as our product candidates if and when approved or commercialized;~~

~~the extent of coverage and reimbursement for OMIDRIA;~~

~~the amount of OMIDRIA chargebacks, rebates and product returns;~~

the extent of any payments received from collaboration arrangements and development funding as well as the achievement of development and clinical milestones under collaboration and license agreements that we may enter into from time to time and that may vary significantly from quarter to quarter; and

the timing, cost and level of investment in our research and development activities as well as expenditures we will or may incur to acquire or develop additional technologies, products and product candidates.

In addition, the number of procedures in which OMIDRIA or any of our product candidates, if commercialized, would be used may be significantly less than the total number of such procedures performed or total possible market size. These and other factors, including our limited history of product sales, may make it difficult for us to forecast and provide accurate guidance (including updates to prior guidance) related to our expected financial performance. If our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.

We have incurred cumulative operating losses since inception. If we are unable to raise additional capital when needed, our commercial operations may be limited, and we may be unable to complete the development and commercialization of our product candidates or to continue our other preclinical development programs.

Our operations have consumed substantial amounts of cash since our incorporation and, as of September 30, 2018, we had an accumulated deficit of approximately $626.6 million. We expect to continue to spend substantial amounts to:

~~initiate and conduct clinical trials and manufacture clinical and registration batches for our programs and product candidates;~~

~~continue OMIDRIA sales and marketing;~~

~~continue research and development in our programs;~~

~~make principal, interest and fee payments under the CRG Loan Agreement; and~~

~~commercialize and launch product candidates for which we may receive regulatory approval.~~

We expect to continue to incur additional losses until such time as we generate significant revenue from the sale of OMIDRIA, other commercial products and/or partnering. We are unable to predict the extent of any future losses and cannot provide assurance that we will generate sufficient revenue from OMIDRIA or other commercial products in the future to fund fully our operations. To date we have not generated revenue from sales of OMIDRIA that is sufficient to fund fully our operations. If we are unable to generate sufficient revenue from the sale of OMIDRIA, other commercialized products and/or partnering arrangements, we may never become and remain profitable and will be required to raise additional capital to continue to fund our operations. We cannot be certain that additional capital will be available to us on acceptable terms, if at all,

when required. Adverse developments to our financial condition or business, as well as disruptions in the global equity and credit markets, may limit our ability to access capital. If we do not raise additional capital when needed through one or more funding avenues, such as corporate partnering or debt or equity financings, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates or one or more of our preclinical programs or other research and development initiatives. In addition, we may be required to seek collaborators for one or more of our current or future products at an earlier stage than otherwise would be desirable or on terms that are less favorable than otherwise might be available or to relinquish or license on unfavorable terms our rights to technologies or products that we otherwise would seek to develop or commercialize ourselves. We also may have insufficient funds or otherwise be unable to advance our preclinical programs, such as potential new drug targets developed from our GPCR program, to a point where they can generate revenue through partnerships, collaborations or other arrangements. Any of these actions could limit the amount of revenue we are able to generate and harm our business and prospects.

~~Management, as well as our independent registered public accounting firm, have concluded that a substantial doubt is deemed to exist concerning our ability to continue as a going concern.~~

ASU 2014-15, requires management to assess our ability to continue as a going concern for one year after the date the financial statements are issued. As further discussed in Part I, Item 1, Note 1 “Organization and Significant Accounting Policies-Going Concern” to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q, given the restrictions and limitations under which the assessment is required to be conducted, substantial doubt is deemed to exist about the company’s ability to continue as a going concern through November 8, 2019. Our financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern will require us to generate positive cash flow from operations, obtain additional financing, enter into strategic alliances and/or sell assets. The reaction of investors to the inclusion of a going concern statement in this Quarterly Report on Form 10-Q, our current lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into strategic alliances and/or make our scheduled debt payments on a timely basis, or at all. If we become unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

~~We are subject to extensive government regulation and the failure to comply with these regulations may have a material adverse effect on our operations and business.~~

Both before and after approval of any product, we and our suppliers, contract manufacturers and clinical investigators are subject to extensive regulation by governmental authorities in the U.S. and other countries, covering, among other things, testing, manufacturing, quality control, clinical trials, post-marketing studies, risk management plans, labeling, advertising, promotion, distribution, import and export, governmental pricing, price reporting and rebate requirements. Failure to comply with applicable requirements could result in one or more of the following actions: warning letters; unanticipated expenditures; delays in approval or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating or marketing restrictions; injunctions; criminal prosecution and civil or criminal penalties including fines and other monetary penalties; adverse publicity; and disruptions to our business. Further, government investigations into potential violations of these laws would require us to expend considerable resources and face adverse publicity and the potential disruption of our business even if we are ultimately found not to have committed a violation.

Obtaining FDA approval of our product candidates requires substantial time, effort and financial resources and may be subject to both expected and unforeseen delays, and there can be no assurance that any approval will be granted on any of our product candidates on a timely basis, if at all. Even if we discuss with, and obtain feedback from, the FDA regarding our proposed clinical trials, clinical data collection protocols, and nonclinical studies before initiating those trials or studies, the FDA may decide that the design of our clinical trials and clinical data collection protocols as actually run or our resulting data are insufficient for approval of our product candidates and require additional preclinical, clinical or other studies or additional work related to chemistry, manufacturing and controls. In addition, we, the FDA or an independent institutional review board or ethics committee may suspend or terminate human clinical trials at any time on various grounds, including a finding that the patients are or would be exposed to an unacceptable health risk or because of the way in which the investigators on which we rely carry out the trials. If we are required to conduct additional trials or to conduct other testing of our product candidates beyond that which we currently contemplate for regulatory approval, if we are unable to complete successfully our clinical trials or other testing, or if the results of these and other trials or tests fail to demonstrate efficacy or raise safety concerns, we may face substantial additional expenses, be delayed in obtaining marketing approval for our product candidates or may never obtain marketing approval.

We are also required to comply with extensive governmental regulatory requirements after a product has received marketing authorization. Governing regulatory authorities may require post-marketing studies that may negatively impact the commercial viability of a product. Once on the market, a product may become associated with previously undetected adverse effects and/or may develop manufacturing difficulties. We are required to comply with other post-marketing requirements including Good Manufacturing Practices, advertising and promotion restrictions, pharmacovigilance requirements including risk management activities, reporting and recordkeeping obligations and other requirements. As a result of any of these requirements or other problems, a product’s regulatory approval could be withdrawn, which could harm our business and operating results. In addition, we must establish and maintain an effective healthcare compliance program in order to comply with U.S. and other laws applicable to marketed drug products and, in particular, laws (such as the Anti-Kickback Statute, the False Claims Act and the Sunshine Act) applicable when drug products are purchased or reimbursed by a federal or state healthcare program. U.S. laws such as the Foreign Corrupt Practices Act prohibit the offering or payment of bribes or inducements to foreign public officials, including potentially physicians or other medical professionals who are employees of public health care entities. In addition, many countries have their own laws similar to the healthcare compliance laws that exist in the U.S. Implementing and maintaining an effective compliance program requires the expenditure of significant time and resources. If we are found to be in violation of any of these laws, we may be subject to significant penalties, including but not limited to civil or criminal penalties, damages and fines as well as exclusion from government healthcare programs.

~~We may face difficulties from changes to current regulations as well as future legislation.~~

Existing regulatory policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, and we may not achieve or sustain profitability.

There is uncertainty with respect to the impact that health care reform legislation may have on coverage and reimbursement for healthcare items and services covered by plans that are authorized by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA. In December 2017 portions of the ACA dealing with the individual mandate insurance requirement were effectively repealed by the Tax Cuts and Jobs Act of 2017, or the 2017 Tax Act, and Congress and/or President Trump may seek to repeal other aspects of the ACA. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. President Trump and the Secretary of Health and Human Services have also made statements about controlling drug prices, including enabling CMS to negotiate U.S. drug pricing to align with foreign drug pricing. We cannot predict the ultimate content, timing or effect of any healthcare reform legislation or executive order or other measure, or the impact that the resulting changes may have on us.

We expect that the ACA, if it remains in effect, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and, in addition, downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate sufficient revenue, attain and/or maintain profitability or commercialize our product candidates. We cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on OMIDRIA or the marketing approvals of our product candidates, if any, may be.

~~U.S. federal income tax reform could adversely affect us.~~

The Tax Act, among other things, includes changes to U.S. federal tax rates, imposes additional limitations on the deductibility of interest, changes to the Orphan Drug Credit, allows for the expensing of capital expenditures, puts into effect the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits. The estimated impact of the Tax Act is based on our management’s current knowledge and assumptions and recognized impacts could be materially different from current estimates based on further analysis of the new law. For the year ended December 31, 2017, we revalued our net deferred tax assets and liabilities at the newly enacted U.S. corporate rate, and the estimated impact was recognized in our financial statements for the year ended December 31, 2017.

~~Failure to obtain and maintain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally.~~

We intend to have OMIDRIA and our product candidates, if approved, marketed outside the U.S. In order to market our products in non-U.S. jurisdictions, we or our partners must obtain separate regulatory approvals and comply with numerous and

varying regulatory requirements. The regulatory approval procedure varies among countries and can involve additional testing and data review. The requirements governing marketing authorization, the conduct of clinical trials, pricing and reimbursement vary from country to country. Approval by the FDA or the EMA does not ensure approval by regulatory agencies in other jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. The time required to obtain regulatory approval outside the U.S. and EU may differ from that required to obtain FDA or EMA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval discussed in these “Risk Factors” and we may not obtain foreign regulatory approvals on a timely basis, or at all. In addition, even if we were able to obtain regulatory approval for a product in one or more foreign jurisdictions, we may need to complete additional requirements to maintain that approval and our ability to market the product in the applicable jurisdiction.

OMIDRIA, as well as any of our product candidates, if approved, that are marketed outside of the United States, may face a variety of risks associated with international operations that, if realized, could materially adversely affect our business.

~~We may be subject to additional risks for OMIDRIA or any of our product candidates that are marketed outside the U.S., including:~~

~~reduced protection for intellectual property rights;~~

~~unexpected changes in tariffs, trade barriers and regulatory requirements, including those associated with the withdrawal of the United Kingdom from the European Union;~~

~~economic weakness, including inflation, or political instability in particular foreign economies and markets;~~

~~foreign currency fluctuations and other obligations incident to doing business in another country; and~~

~~business interruptions resulting from geopolitical actions, including war and terrorism or natural disasters including earthquakes, typhoons, floods and fires.~~

~~Any of these risks, if realized, could increase our operating expenses and reduce our revenues.~~

We have no internal capacity to manufacture commercial or clinical supplies of OMIDRIA, or our product candidates, and intend to rely solely on third-party manufacturers. If the contract manufacturers that we rely on experience difficulties manufacturing and supplying OMIDRIA, or our product candidates, or fail FDA or other regulatory inspections, our clinical trials, regulatory submissions, and ability to sell OMIDRIA, or any other commercialized product, and generate revenue, may be significantly limited or delayed.

We rely and intend to continue to rely on third-party manufacturers to produce commercial quantities of OMIDRIA and clinical drug supplies of our product candidates that are needed for clinical trials and to support New Drug Applications, Biologics License Applications, or similar applications to regulatory authorities seeking marketing approval for our product candidates. We cannot provide any assurance that we will be able to enter into or maintain these types of arrangements on commercially reasonable terms, or at all. If we or the manufacturer were to terminate one of these arrangements early, or the manufacturer was unable to supply product quantities sufficient to meet our requirements, we would be required to transfer the manufacturing to an approved alternative facility and/or establish additional manufacturing and supply arrangements. We may also need to establish additional or replacement manufacturers, potentially with little or no notice, in the event that one of our manufacturers fails to comply with FDA and/or other pharmaceutical manufacturing regulatory requirements. Even if we are able to establish additional or replacement manufacturers, identifying these sources and entering into definitive supply agreements and obtaining regulatory approvals may require a substantial amount of time and cost and may create a shortage of the product. It can take several years to qualify and validate a new contract manufacturer, and we cannot guarantee that we would be able to complete in a successful and timely manner the appropriate validation processes or obtain the necessary regulatory approvals for one or more additional or replacement manufacturers. Such alternate supply arrangements may not be available on commercially reasonable terms, or at all. Additionally, if we are unable to engage multiple suppliers to manufacture our products, we may have inadequate supply to meet the demand of our product.

In addition, OMS721 is a biologic drug product and any other product candidate from certain of our programs, including but not limited to MASP-2 and MASP-3, could be a biologic drug product, and we do not have the internal capability to produce biologics for use in clinical trials or on a commercial scale. There are only a limited number of manufacturers of biologic drug products and we cannot be certain that we can enter into supply agreements with a sufficient number of them on commercially reasonable terms, if at all. The regulatory requirements for commercial supply are more stringent than for clinical supply and we cannot guarantee that a contract manufacturer producing drug product for clinical trials will be able to complete

~~in a successful and timely manner the appropriate validation processes or obtain the necessary regulatory approvals for marketing approval and commercial supply in a timely manner or at all.~~

Our contract manufacturers may encounter difficulties with formulation, manufacturing, supply chain and/or release processes that could result in delays in clinical trials and/or regulatory submissions or that could impact adversely the commercialization of our products or product candidates, as well as in the initiation of enforcement actions by the FDA and other regulatory authorities. These difficulties also could result in the recall or withdrawal of a product from the market or a failure to have adequate supplies to meet market demand. If the safety or quality of OMIDRIA or any product candidate supplied by contract manufacturers is compromised due to one or more of those contract manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to maintain regulatory approval of OMIDRIA, to continue sales and marketing of OMIDRIA or to obtain and maintain regulatory approval for one or more of our product candidates, which would harm our business and prospects significantly.

~~Any significant delays in the manufacture and/or supply of clinical or commercial supplies could materially harm our business, financial condition, results of operations and prospects.~~

Ingredients, excipients, test kits and other materials necessary to manufacture OMIDRIA, or our product candidates, may not be available on commercially reasonable terms, or at all, which may adversely affect the development and commercialization of OMIDRIA or those product candidates.

We and our third-party manufacturers must obtain from third-party suppliers the active pharmaceutical ingredients, excipients, and/or other raw materials plus primary and secondary packaging materials necessary for our contract manufacturers to produce OMIDRIA and our product candidates for our clinical trials and, to the extent approved or commercialized, for commercial distribution. Although we have entered or intend to enter into agreements with third-party suppliers that will guarantee the availability and timely delivery of active pharmaceutical ingredients, excipients, test kits and materials for OMIDRIA and our product candidates, we have not yet entered into agreements for the supply of all such ingredients, excipients, test kits or materials, and we may be unable to secure all such supply agreements or guarantees on commercially reasonable terms, if at all. Even if we were able to secure such agreements or guarantees, our suppliers may be unable or choose not to provide us the ingredients, excipients or materials in a timely manner or in the quantities required. If we or our third-party manufacturers are unable to obtain the quantities of these ingredients, excipients or materials that are necessary for the manufacture of commercial supplies of OMIDRIA, our ability to generate revenue from the sale of OMIDRIA would be materially and adversely affected. Further, if we or our third-party manufacturers are unable to obtain active pharmaceutical ingredients, excipients, test kits and materials as necessary for our clinical trials or for the manufacture of commercial supplies of our product candidates, if approved, potential regulatory approval or commercialization would be delayed, which would materially and adversely affect our ability to generate revenue from the sale of our product candidates.

If our clinical trials or clinical protocols are delayed, suspended or terminated, we may be unable to develop our product candidates on a timely basis, which would adversely affect our ability to obtain regulatory approvals, increase our development costs and delay or prevent commercialization of approved products.

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials and clinical data collection protocols that will cause regulatory agencies, institutional review boards or ethics committees, or us to delay our clinical trials or suspend or delay the analysis of the data from those trials. Clinical trials and clinical data collection protocols can be delayed for a variety of reasons, including:

~~discussions with the FDA, the EMA or other foreign authorities regarding the scope or design of our clinical trials and clinical data collection protocols;~~

delays or the inability to obtain required approvals from institutional review boards, ethics committees or other responsible entities at clinical sites selected for participation in our clinical trials;

delays in enrolling patients into clinical trials or collecting historical control data for any reason including disease severity, trial or data collection protocol design, study eligibility criteria, patient population size (~~e.g.~~, for orphan diseases or for some pediatric indications), proximity and/or availability of clinical trial sites for prospective patients, availability of competing therapies and clinical trials, regional differences in diagnosis and treatment, perceived risks and benefits of the product or product candidate, physician patient referral practices or the ability to monitor patients adequately before and after treatment;

~~lower than anticipated retention rates of patients in clinical trials;~~

the need to repeat or conduct additional clinical trials as a result of inconclusive or negative results, failure to replicate positive early clinical data in subsequent clinical trials, failure to deliver an efficacious dose of a product candidate,

~~poorly executed testing, a failure of a clinical site to adhere to the clinical protocol, an unacceptable study design or other problems;~~

~~adverse findings in clinical or nonclinical studies related to the safety of our product candidates in humans;~~

~~an insufficient supply of product candidate materials or other materials necessary to conduct our clinical trials;~~

~~the need to qualify new suppliers of product candidate materials for FDA and foreign regulatory approval;~~

~~an unfavorable inspection or review by the FDA, or other regulatory authority, of a clinical trial site or records of any clinical investigation;~~

~~the occurrence of unacceptable drug-related side effects or adverse events experienced by participants in our clinical trials;~~

~~the suspension by a regulatory agency of a trial put on a clinical hold; or~~

the amendment of clinical trial or data collection protocols to reflect changes in regulatory requirements and guidance or other reasons as well as subsequent re-examination of amendments of clinical trial or data collection protocols by institutional review boards or ethics committees.

In addition, a clinical trial or development program may be suspended or terminated by us, the FDA or other regulatory authorities, or institutional review boards or ethics committees, due to a number of factors, including:

~~failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;~~

~~inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;~~

~~the failure to remove a clinical hold in a timely manner (which we cannot predict with certainty), if at all;~~

~~unforeseen safety issues or any determination that a trial presents unacceptable health risks;~~

~~inability to deliver an efficacious dose of a product candidate; or~~

lack of adequate funding to continue the clinical trial or development program, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.

If the results of our clinical trials are not available when we expect or if we encounter any delay in the analysis of data from our clinical trials, we may be unable to file for regulatory approval or conduct additional clinical trials on the schedule we currently anticipate. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Any delays in completing our clinical trials could increase our development costs, could slow down our product development and regulatory submission process, could delay our receipt of product revenue and could make it difficult to raise additional capital. In addition, significant clinical trial delays also could allow our competitors to bring products to market before we do and impair our ability to commercialize our future products, potentially harming our business.

Because we have a number of product candidates and development programs, we may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications for which there is a greater likelihood of obtaining regulatory approval and that may be more profitable, if approved.

We have limited resources and must focus on the product candidates and clinical and preclinical development programs that we believe are the most promising. As a result, we may forgo or delay the pursuit of opportunities with other product candidates or other indications that later prove to have greater commercial potential and may not be able to progress development programs as rapidly as otherwise possible. Further, if we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product through collaboration, license or other royalty arrangements in cases in which it would have been advantageous for us to retain sole development and commercialization rights.

Our preclinical programs may not produce product candidates that are suitable for clinical trials, our product candidates may not successfully complete clinical development and/or our product candidates may not be suitable for successful commercialization or generation of revenue through partnerships.

We must complete successfully preclinical testing, which may include demonstrating efficacy and the lack of toxicity in established animal models, before commencing clinical trials for any product candidate. Many pharmaceutical and biological product candidates do not successfully complete preclinical testing. There can be no assurance that positive results from preclinical studies will be predictive of results obtained from subsequent preclinical studies or clinical trials. Even if preclinical testing is successfully completed, we cannot be certain that any product candidates that do advance into clinical trials will

successfully demonstrate safety and efficacy in clinical trials. Even if we achieve positive results in early clinical trials, they may not be predictive of the results in later trials, and safety and/or efficacy outcomes of early clinical trials may not be consistent with outcomes of subsequent clinical trials.

We may incur substantial costs as a result of commercial disputes, claims, litigation or other legal proceedings relating to our business operations, especially with regard to patent and other intellectual property rights and such costs or an adverse outcome in such a proceeding may have a material negative effect on our financial condition, results of operations or stock price.

Like other biopharmaceutical companies, our business involves numerous commercial contractual arrangements, important intellectual property rights, potential product liability, uncertainties with respect to clinical development, manufacture and regulatory approvals and other aspects that create heightened risks of disputes, claims and legal proceedings. These include claims that may be faced in one or more jurisdictions related to the safety of our product candidates and products, the development of our product candidates, our ability to obtain regulatory approval for our product candidates, our expectations regarding product development and regulatory approval, sales and marketing practices, commercial disputes, competition, environmental matters, employment matters and other matters. These matters could consume significant time and resources, even if we are successful. Some of our competitors may be able to sustain the costs of complex litigation more effectively than we can because they have substantially greater resources. In addition, we may pay damage awards or settlements or become subject to equitable remedies that could, individually or in the aggregate, have a material negative effect on our financial condition, results of operations or stock price. Any uncertainties resulting from the initiation and continuation of any litigation also could have a material adverse effect on our ability to raise the capital necessary to continue our operations.

Like other biopharmaceutical companies, we may initiate or become subject to litigation regarding patents and other intellectual property rights. Patent infringement litigation involves many complex technical and legal issues and its outcome is often difficult to predict and the risk involved in doing so can be substantial. Generic drug manufacturers could seek approval to market a generic version of our products or challenge our intellectual property rights with respect to our product candidates. If we choose to go to court or take other enforcement action to stop someone else from using our inventions, that individual or company has the right to ask the court to rule that our underlying patents are invalid or should not be enforced against that third-party. In addition, a lawsuit or patent office proceeding could result in a finding that some or all of the claims of one or more of our relevant patents are invalid, unenforceable and/or not infringed, and could also result in a generic version of any of our products being launched prior to the expiration of our related patents. There is also the risk that, even if the validity of these patents is upheld, a court will refuse to stop the other party on the ground that such other party’s activities do not infringe our patents. Separately, although we have conducted searches of third-party patents with respect to our programs, a third party could also claim that we or our contract manufacturers are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in the alleged infringing activity, including making, using or selling our products and product candidates. An adverse outcome in any such intellectual property matter could have a material negative effect on our financial condition, results of operations or stock price.

~~It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection.~~

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection for the use, formulation and structure of our products and product candidates, the methods used to manufacture them, the related therapeutic targets and associated methods of treatment as well as on successfully defending these patents against potential third-party challenges. Our ability to protect our products and product candidates from unauthorized making, using, selling, offering to sell or importing by third parties is dependent on the extent to which we have rights under valid and enforceable patents that cover these activities.

The patent positions of pharmaceutical, biotechnology and other life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in interpretations of patent laws in the U.S. and other countries may diminish the value of our intellectual property. Further, the determination that a patent application or patent claim meets all of the requirements for patentability is a subjective determination based on the application of law and jurisprudence. The ultimate determination by the U.S. Patent and Trademark Office or by a court or other trier of fact in the U.S., or corresponding foreign national patent offices or courts, on whether a claim meets all requirements of patentability cannot be assured. Although we have conducted searches for third-party publications, patents and other information that may affect the patentability of claims in our various patent applications and patents, we cannot be certain that all relevant information has been identified. Accordingly, we cannot predict the breadth of

~~claims that may be allowed or enforced in our patents or patent applications, in our licensed patents or patent applications or in third-party patents.~~

We cannot provide assurances that any of our patent applications will be found to be patentable, including over our own prior art patents, or will issue as patents. Neither can we make assurances as to the scope of any claims that may issue from our pending and future patent applications nor to the outcome of any proceedings by any potential third parties that could challenge the patentability, validity or enforceability of our patents and patent applications in the U.S. or foreign jurisdictions. Any such challenge, if successful, could limit patent protection for our products and product candidates and/or materially harm our business.

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

~~we may not be able to generate sufficient data to support full patent applications that protect the entire breadth of developments in one or more of our programs, including our GPCR program;~~

it is possible that one or more of our pending patent applications will not become an issued patent or, if issued, that the patent(s) will be sufficient to protect our technology, provide us with a basis for commercially viable products or provide us with any competitive advantages;

~~if our pending applications issue as patents, they may be challenged by third parties as not infringed, invalid or unenforceable under U.S. or foreign laws; or~~

~~if issued, the patents under which we hold rights may not be valid or enforceable.~~

In addition, to the extent that we are unable to obtain and maintain patent protection for one of our products or product candidates or in the event that such patent protection expires or is limited to method of use patent protection, it may no longer be cost-effective to extend our portfolio by pursuing additional development of a product or product candidate for follow-on indications.

We also may rely on trade secrets to protect our technologies or products, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisers may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third-party entity illegally obtained and is using any of our trade secrets is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the U.S. are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

The terms of our debt facility place restrictions on our operating and financial flexibility and, if we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

We have borrowed $125.0 million under the CRG Loan Agreement and pledged substantially all of our assets, including intellectual property, as collateral. The CRG Loan Agreement restricts our ability to, among other things, incur indebtedness, grant liens, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay cash dividends or make distributions, repurchase stock, license certain of our intellectual property on an exclusive basis and engage in significant business transactions such as a change of control. Any of these restrictions could significantly limit our operating and financial flexibility and ability to respond to changes in our business or competitive activities.

After 2018, the CRG Loan Agreement requires us to achieve either (a) certain minimum net revenue amounts through the end of 2021, which is $75.0 million for the 2019 calendar year, or (b) a minimum market capitalization threshold equal to the product of 3.0 multiplied by the aggregate principal amount of loans outstanding under the CRG Loan Agreement determined as of the fifth business day following announcement of earnings results for the applicable year (~~i.e.~~, $375.0 million). In the event we do not achieve either of the minimum revenue amount or the minimum market capitalization threshold for a year, we can satisfy the requirement by raising additional funds through an equity or subordinated debt issuance and using the proceeds to pay down the loan balance by an amount equal to the difference between the minimum revenue amount for such year and the actual revenue amount for such year. We cannot guarantee that we will satisfy the 2019 annual revenue covenant in the CRG Loan Agreement or the alternative market capitalization covenant that will be calculated in February or March 2020.

The failure to satisfy these or other obligations under the CRG Loan Agreement would constitute an event of default. An event of default under the CRG Loan Agreement also includes the occurrence of any material adverse effect upon our business, condition (financial or otherwise), operations, performance or property taken as a whole. If there is an event of default under the CRG Loan Agreement, the lenders may have the right to accelerate all of our repayment obligations and to take control of our pledged assets, which include substantially all of our assets including our intellectual property. Upon the acceleration of the

loan, we will be required to repay the loan immediately or to attempt to reverse the declaration through negotiation or litigation. Further, if we are liquidated, the lenders’ right to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. Any declaration of an event of default could significantly harm our business and prospects and could cause our stock price to decline. If we raise any additional debt financing, the terms of such debt could further restrict our operating and financial flexibility.

~~Our competitors may develop products that are less expensive, safer or more effective, or which may otherwise diminish or eliminate the success of any products that we may commercialize.~~

We may not achieve commercial success if our competitors, many of whom have significantly more resources and experience than we, market products that are safer, more effective, less expensive or faster to reach the market than OMIDRIA or any future products that we may develop and commercialize. Our competitors also may market a product that proves to be unsafe or ineffective, which may affect the market for our competing product, or future product, regardless of the safety or efficacy of our product. The failure of OMIDRIA or any other future product that we may market to compete effectively with products marketed by our competitors would impair our ability to generate revenue, which would have a material adverse effect on our future business, our financial condition and our results of operations.

~~The loss of members of our management team could substantially disrupt our business operations.~~

Our success depends to a significant degree on the continued individual and collective contributions of our management team. The members of our management team are at-will employees, and we do not maintain any key-person life insurance policies other than on the life of Gregory A. Demopulos, M.D., our president, chief executive officer and chairman of the board of directors. Losing the services of any key member of our management team, whether from death or disability, retirement, competing offers or other causes, without having a readily available and appropriate replacement could delay the execution of our business strategy, cause us to lose a strategic partner, or otherwise materially affect our operations.

~~We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to maintain our operations or grow effectively.~~

Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. If we are unable to hire and train a sufficient number of qualified employees for any reason, we may not be able to implement our current initiatives or grow effectively. We have in the past maintained a rigorous, highly selective and time-consuming hiring process. We believe that our approach to hiring has significantly contributed to our success to date. If we do not succeed in attracting qualified personnel and retaining and motivating existing personnel, our existing operations may suffer, and we may be unable to grow effectively.

~~We may encounter difficulties managing our growth, which could delay our business plans or adversely affect our results of operations.~~

To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to manage effectively the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations. Additionally, our inability to manage growth effectively could cause our operating costs to grow even faster than we currently are anticipating.

~~Product liability claims may damage our reputation and, if insurance proves inadequate, these claims may harm our business.~~

We may be exposed to the risk of product liability claims that is inherent in the biopharmaceutical industry. A product liability claim may damage our reputation by raising questions about our product’s safety and efficacy and could limit our ability to sell one or more products by preventing or interfering with commercialization of our products and product candidates. In addition, product liability insurance for the biopharmaceutical industry is generally expensive to the extent it is available at all. There can be no assurance that we will be able to obtain or maintain such insurance on acceptable terms or that we will be able to secure and maintain increased coverage for OMIDRIA or for our product candidates, if commercialization progresses, or that future claims against us will be covered by our product liability insurance. Further, our product liability insurance coverage may not reimburse us or may be insufficient to reimburse us for any or all expenses or losses we may suffer. A successful claim against us with respect to uninsured liabilities or in excess of insurance coverage could have a material adverse effect on our business, financial condition and results of operations.

We rely on third parties to conduct portions of our preclinical research and clinical trials. If these third parties do not perform as contractually required or otherwise expected, or if we fail to adequately supervise or monitor these parties, we may not be able to obtain regulatory approval for or commercialize our product candidates.

We rely on third parties, such as CROs, medical and research institutions and clinical investigators, to conduct a portion of our preclinical research and assist us in conducting our clinical trials. Nonetheless, we are responsible for confirming that our preclinical research and clinical trials are conducted in accordance with applicable regulations, the relevant trial protocol and within the context of approvals by an institutional review board or ethics committee, and we may not always be successful in ensuring such compliance. Our reliance on these third parties does not relieve us of responsibility for ensuring compliance with FDA and other regulations and standards for conducting, monitoring, recording and reporting the results of preclinical research and clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical and clinical development processes may be extended, delayed, suspended or terminated, and we may not be able to commercialize or obtain regulatory approval for our product candidates.

We may need to maintain licenses for active ingredients from third parties to develop and commercialize some of our product candidates, which could increase our development costs and delay our ability to commercialize those product candidates.

Should we decide to use active pharmaceutical ingredients in any of our product candidates that are proprietary to one or more third parties, such as our PDE7 program (OMS527), we would need to maintain licenses to those active ingredients from those third parties. If we are unable to continue to access rights to these active ingredients prior to conducting preclinical toxicology studies intended to support clinical trials, we may need to develop alternate product candidates from these programs by either accessing or developing alternate active ingredients, resulting in increased development costs and delays in commercialization of these product candidates. If we are unable to maintain continued access rights to the desired active ingredients on commercially reasonable terms or develop suitable alternate active ingredients, or if we do not meet diligence or other obligations under the corresponding licenses, we may not be able to commercialize product candidates from these programs.

~~We use hazardous materials in our business and must comply with environmental laws and regulations, which can be expensive.~~

Our research operations produce hazardous waste products, which include chemicals and radioactive and biological materials. We are subject to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials comply with applicable legal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. We generally contract with third parties for the disposal of such substances and store our low-level radioactive waste at our facility until the materials are no longer considered radioactive. We may be required to incur further costs to comply with current or future environmental and safety regulations. In addition, although we carry insurance, in the event of accidental contamination or injury from these materials, we could be held liable for any damages that result and any such liability could exceed our insurance coverage and other resources.

~~Cyber-attacks or other failures in telecommunications or information technology systems could result in information theft, data corruption and significant disruption of our business operations.~~

We utilize information technology systems and networks to process, transmit and store electronic information in connection with our business activities. As use of digital technologies has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, have increased in frequency and sophistication. These threats pose a risk to the security of our systems and networks, the confidentiality and the availability and integrity of our data. There can be no assurance that we will be successful in preventing cyber-attacks or successfully mitigating their effects. Similarly, there can be no assurance that our collaborators, CROs, third-party logistics providers, distributors and other contractors and consultants will be successful in protecting our clinical and other data that is stored on their systems. Any cyber-attack or destruction or loss of data could have a material adverse effect on our business and prospects. In addition, we may suffer reputational harm or face litigation or adverse regulatory action as a result of cyber-attacks or other data security breaches and may incur significant additional expense to implement further data protection measures.

~~Risks Related to Our Common Stock~~

~~Our stock price has been and may continue to be volatile, and the value of an investment in our common stock may decline.~~

During the 12-month period ended September 30, 2018, our stock traded as high as $27.00 per share and as low as $8.36 per share. The trading price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, many of which are beyond our control. In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of publicly traded companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

If we issue additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing shareholders would experience further dilution.

To the extent that we raise additional funds in the future by issuing equity securities, our shareholders would experience dilution, which may be significant and could cause the market price of our common stock to decline significantly. In addition, approximately 10,366,645 shares of common stock as of September 30, 2018 subject to outstanding options and warrants may become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements. Further, as of September 30, 2018, we also had approximately 2,210,945 shares of common stock reserved for future issuance under our employee benefit plans that are not subject to outstanding options. If the holders of these outstanding options or warrants elect to exercise some or all of them, or if the shares subject to our employee benefit plans are issued and become eligible for sale in the public market, our shareholders would experience dilution and the market price of our common stock could decline.

Anti-takeover provisions in our charter documents and under Washington law could make an acquisition of us, which may be beneficial to our shareholders, difficult and prevent attempts by our shareholders to replace or remove our current management.

Provisions in our articles of incorporation and bylaws and under Washington law may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on shareholder actions by less than unanimous written consent, restrictions on the ability of shareholders to fill board vacancies and the ability of our board of directors to issue preferred stock without shareholder approval. In addition, because we are incorporated in Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which, among other things, restricts the ability of shareholders owning 10% or more of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer may be considered beneficial by some shareholders. In addition, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it difficult for shareholders to replace members of our board of directors, which is responsible for appointing the members of our management.

~~We have never declared or paid dividends on our capital stock, and we do not anticipate paying dividends in the foreseeable future.~~

Our business requires significant funding. We currently plan to invest all available funds and future earnings, if any, in the development and growth of our business. Additionally, under the CRG Loan Agreement, we have agreed not to pay any cash dividends. Therefore, we currently do not anticipate paying any cash dividends on our common stock in the foreseeable future. As a result, a rise in the market price of our common stock, which is uncertain and unpredictable, will be the sole source of potential gain for shareholders in the foreseeable future, and an investment in our common stock for dividend income should not be relied upon.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Unregistered Sales of Equity Securities. On April 12, 2018, we issued warrants to purchase an aggregate of 200,000 shares of common stock, or the CRG Warrants, to the CRG Loan Agreement lenders. For more information regarding the CRG Warrants, refer to Item 1.01 of our Current Report on Form 8-K that was filed with the SEC on April 13, 2018.None.

ITEM 6. EXHIBITS



Exhibit Number	Description
~~10.1(1)~~	~~Settlement Agreement, dated as of May 22, 2018, by and among Omeros Corporation and Lupin Ltd. and Lupin Pharmaceuticals, Inc.~~
31.1	Certification of Principal Executive Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document


~~(1)~~	~~Incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed on May 24, 2018 (File No. 001-34475).~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	OMEROS CORPORATION

Dated: ~~November 8, 2018~~May 9, 2019	/s/ Gregory A. Demopulos
	Gregory A. Demopulos, M.D.
	President, Chief Executive Officer and Chairman of the Board of Directors

Dated: ~~November 8, 2018~~May 9, 2019	/s/ Michael A. Jacobsen
	Michael A. Jacobsen
	Vice President, Finance, Chief Accounting Officer and Treasurer

~~-38-~~-27-



	Page
Part I — Financial Information	3
Item 1. Financial Statements (unaudited)	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Operations and Comprehensive Loss	4
Condensed Consolidated Statements of Cash Flows	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1315
Item 3. Quantitative and Qualitative Disclosures About Market Risk	2324
Item 4. Controls and Procedures	2324
Part II — Other Information	2425
Item 1. Legal Proceedings	2425
Item 1A. Risk Factors	2425
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6. Exhibits	3726
Signatures	3827

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