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 March 31, ~~2019~~

2020



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
~~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)~~ (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 May ~~7, 2019~~,6, 2020, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was ~~49,057,866.~~54,510,667.

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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~~(the Securities ~~Act,~~Act) and Section 21E of the Securities Exchange Act of 1934 ~~or the~~(the Exchange ~~Act,~~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,” “target,” “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~~related to ~~demand~~obtaining permanent separate or similar reimbursement for OMIDRIA^® (phenylephrine and ketorolac intraocular solution) 1%/0.3% from the Centers for Medicare & Medicaid Services (CMS) for periods after September 30, 2020, and our expectations regarding reimbursement coverage for OMIDRIA by commercial and government payers;

●

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

●

our expectations relating to demand for OMIDRIA from wholesalers, ambulatory surgery centers ~~or ASCs,~~(ASCs) and hospitals, and our expectations regarding OMIDRIA product sales;

●

the severity and duration of the impact of COVID-19 on our business, operations, clinical programs and financial results;

●

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

●

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

●

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 lead MASP-2 inhibitor, narsoplimab (also referred to as OMS721), and for our other investigational candidates, including OMS527 and OMS906;

●

with respect to our 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 we can capitalize on the financial and regulatory incentives provided by orphan drug designations granted by the U.S. Food and Drug Administration (FDA), the European Commission (EC), or the European Medicines Agency (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 hematopoietic stem cell transplant-associated thrombotic microangiopathy (HSCT-TMA), Immunoglobulin A (IgA) nephropathy, and atypical hemolytic uremic syndrome (aHUS);

●

whether and when we will complete the rolling Biologics License Application (BLA) for narsoplimab in HSCT-TMA and whether and when FDA will accept submission and grant accelerated or regular approval;

●

whether and when a BLA may be filed with the FDA for narsoplimab in any other indication and whether FDA will grant accelerated or regular approval;

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●

whether and when a marketing authorization application (MAA) may be filed with the EMA for narsoplimab in any indication, and whether the EMA will grant approval for narsoplimab in any indication;

●

our plans for the commercial launch of narsoplimab following any regulatory approval and our estimates and expectations regarding coverage and reimbursement for any approved products;

●

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

●

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 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.

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

our expectations related to obtaining a permanent separate or similar reimbursement for OMIDRIA from the Centers for Medicare & Medicaid Services, or 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;~~

in our 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 we can capitalize on the financial and regulatory incentives provided by orphan drug designations granted by the 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;

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

~~whether and 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 for narsoplimab in any indication;~~

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 arrangement with respect to OMIDRIA in the European Union, or EU, or in other foreign countries;

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

~~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.~~

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.~~(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.

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OMEROS CORPORATION

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

2020

INDEX

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OMEROS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)

March 31,
2019 December 31,
2018
Assets
Current assets:
Cash and cash equivalents $ 4,054

$ 5,861
Short-term investments 43,168

54,637
Receivables, net 24,718

22,818
Inventory 736

88
Prepaid expense and other assets 4,195

6,463
Total current assets 76,871

89,867
Property and equipment, net 4,479

3,845
Right of use assets 17,514

—
Restricted investments 1,154

1,154
Advanced payments, non-current 1,228

1,070
Total assets $ 101,246

$ 95,936
Liabilities and shareholders’ deficit

Current liabilities:

Accounts payable $ 7,121

$ 6,281
Accrued expenses 34,823

30,186
Current portion of lease liabilities 2,561

889
Total current liabilities 44,505

37,356
Lease liabilities, non-current 26,578

1,578
Unsecured convertible senior notes, net 151,182

148,981
Deferred rent —

8,177
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 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 552,961

549,479
Accumulated deficit (674,470 )
(650,125 )
Total shareholders’ deficit (121,019 )
(100,156 )
Total liabilities and shareholders’ deficit $ 101,246

$ 95,936


	March 31,		December 31,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	7,118	$	3,084
Short-term investments		46,862		57,704
Receivables, net		24,117		35,185
Inventory		1,211		1,147
Prepaid expense and other assets		6,303		6,625
Total current assets		85,611		103,745
Property and equipment, net		3,355		3,829
Right of use assets		27,081		27,082
Restricted investments		1,154		1,154
Advanced payments, non-current		1,013		1,159
Total assets	$	118,214	$	136,969

Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable	$	12,960	$	5,328
Accrued expenses		41,379		46,627
Current portion of lease liabilities		3,597		3,504
Total current liabilities		57,936		55,459
Lease liabilities, non-current		31,396		32,318
Unsecured convertible senior notes, net		160,746		158,213
Commitments and contingencies (Note 8)
Shareholders’ deficit:
Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; NaN issued and outstanding at March 31, 2020 and December 31, 2019.		—		—
Common stock, par value $0.01 per share, 150,000,000 shares authorized at March 31, 2020 and December 31, 2019; 54,507,667 and 54,200,810 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively.		545		542
Additional paid-in capital		631,233		625,048
Accumulated deficit		(763,642)		(734,611)
Total shareholders’ deficit		(131,864)		(109,021)
Total liabilities and shareholders’ deficit	$	118,214	$	136,969

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)

Three Months Ended
March 31,
2019 2018
Revenue:

Product sales, net $ 21,779

$ 1,588

Costs and expenses:

Cost of product sales 131

203
Research and development 26,255

18,140
Selling, general and administrative 14,632

10,934
Total costs and expenses 41,018

29,277
Loss from operations (19,239 )
(27,689 )
Interest expense (5,600 )
(2,825 )
Other income 494

460
Net loss $ (24,345 )
$ (30,054 )
Comprehensive loss $ (24,345 )
$ (30,054 )
Basic and diluted net loss per share $ (0.50 )
$ (0.62 )
Weighted-average shares used to compute basic and diluted net loss per share 49,014,009

48,284,019


	Three Months Ended
	March 31,
	2020		2019
Revenue:
Product sales, net	$	23,537	$	21,779

Costs and expenses:
Cost of product sales		267		131
Research and development		28,911		26,255
Selling, general and administrative		18,036		14,632
Total costs and expenses		47,214		41,018
Loss from operations		(23,677)		(19,239)
Interest expense		(5,903)		(5,600)
Other income		549		494
Net loss	$	(29,031)	$	(24,345)
Comprehensive loss	$	(29,031)	$	(24,345)
Basic and diluted net loss per share	$	(0.53)	$	(0.50)
Weighted-average shares used to compute basic and diluted net loss per share		54,299,813		49,014,009

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

Three Months Ended
March 31,
2019
2018
Operating activities:
Net loss $ (24,345 )
$ (30,054 )
Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation expense 3,374

2,966
Non-cash interest expense 2,201

1,086
Depreciation and amortization 377

223
Changes in operating assets and liabilities:

Receivables (1,900 )
16,962
Inventory (648 )
196
Prepaid expenses and other assets 2,110

(840 )
Accounts payable and accrued expenses 5,883

(1,835 )
Net cash used in operating activities (12,948 )
(11,296 )
Investing activities:

Purchases of property and equipment (182 )
(183 )
Purchases of investments (281 )
(270 )
Proceeds from the sale and maturities of investments 11,750

9,000
Net cash provided by investing activities 11,287

8,547
Financing activities:

Proceeds upon exercise of stock options and warrants 108

687
Payments on finance lease liabilities (254 )
(143 )
Net cash provided by (used in) financing activities (146 )
544
Net decrease in cash and cash equivalents (1,807 )
(2,205 )
Cash and cash equivalents at beginning of period 5,861

3,394
Cash and cash equivalents at end of period $ 4,054

$ 1,189
Supplemental cash flow information

Cash paid for interest $ 82

$ 1,739
Conversion of accrued interest to notes payable $ —

$ 838


	Three Months Ended March 31,
	2020		2019
Operating activities:
Net loss	$	(29,031)	$	(24,345)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		3,476		3,374
Non-cash interest expense		2,533		2,201
Depreciation and amortization		402		377
Changes in operating assets and liabilities:
Receivables		11,068		(1,900)
Inventory		(64)		(648)
Prepaid expenses and other assets		628		2,110
Accounts payable and accrued expenses		1,847		5,883
Net cash used in operating activities		(9,141)		(12,948)
Investing activities:
Purchases of property and equipment		(66)		(182)
Purchases of investments		(3,176)		(281)
Proceeds from the sale and maturities of investments		14,018		11,750
Net cash provided by investing activities		10,776		11,287
Financing activities:
Proceeds upon exercise of stock options		2,712		108
Principal payments on finance lease liabilities		(313)		(254)
Net cash provided by (used in) financing activities		2,399		(146)
Net increase (decrease) in cash and cash equivalents		4,034		(1,807)
Cash and cash equivalents at beginning of period		3,084		5,861
Cash and cash equivalents at end of period	$	7,118	$	4,054

Supplemental cash flow information
Cash paid for interest	$	89	$	82
Property acquired under finance lease	$	22	$	—

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Organization and 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, disorders of the central nervous system, and immune-related diseases, including cancers. Our first drug product, OMIDRIA, is marketed in the United States (U.S.) for use during cataract surgery or intraocular lens replacement.

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~~1 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 March 31, 2020 and December 31, 2019 and for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 includes all adjustments, which include normal recurring adjustments, necessary to present fairly our interim financial information. The Condensed Consolidated Balance Sheet at December 31, ~~2018~~2019 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, ~~2018,~~2019, which was filed with the U.S. Securities and Exchange Commission (SEC) on March ~~1, 2019.~~2, 2020.

Risks and Uncertainties Related to COVID-19

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, China and has since spread around the world. On March 11, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 a global pandemic. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on our business. On March 18, 2020, The American Academy of Ophthalmology issued a letter recommending that all ophthalmologists immediately cease providing any treatment other than urgent or emergent care. Upon this recommendation the ambulatory surgery centers (ASCs) and hospitals using OMIDRIA postponed nearly all cataract surgery. Consequently, our sales of OMIDRIA to our wholesalers have been minimal following the announcement. In early May, a large number of states began re-opening ASCs and hospitals to cataract surgery, and we have had facilities in at least 36 states initiate re-ordering of OMIDRIA from our wholesalers. The COVID-19 pandemic could have a continuing adverse impact on our business, operations and financial results, including through sustained limitations on cataract surgery and corresponding reduction in demand for OMIDRIA, disruptions in commercial sales activities, higher than normal volume of OMIDRIA product returns, delays or disruptions with respect to manufacturing of clinical or commercial supply, delays in our clinical trials or in the submission or review of regulatory applications, as well as a deterioration of general economic conditions. Due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, it is not possible to estimate precisely its impact on our business, operations or financial results; however, the impact could be material.

Going Concern Discussion

As of March 31, 2020, we had cash, cash equivalents and short-term investments of $54.0 million and an accounts receivable-based line of credit that allows us to borrow up to $50.0 million depending on our eligible accounts receivable

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borrowing base. We have incurred losses from operations of $23.7 million and $63.4 million for the three months ended March 31, 2020, and the year ended December 31, 2019, respectively. Cash used in operating activities was $9.1 million and $60.1 million for the three months ended March 31, 2020, and the year ended December 31, 2019, respectively. We will continue to ~~advance a series of clinical~~incur losses from operations as revenues exceed operating costs 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 October 1, 2018, debt service obligations.

OMIDRIA pass-through reimbursement ~~was reinstated for a two-year period~~is scheduled to end on September 30, 2020 and ~~quarterly~~our first quarter 2020 sales of OMIDRIA ~~net sales returned to historical levels. We believe~~were negatively affected by the COVID-19 pandemic. As such, we cannot predict future OMIDRIA ~~sales will continue to grow in 2019; however,~~revenues due to the ~~recent re-introduction~~uncertain impact of these circumstances on sales of OMIDRIA in 2020 and beyond. Similarly, 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 ~~not included~~unable to include in the determination regarding our prospects as a going ~~concern. Similarly, we are unable to include in the determination~~concern amounts available under our accounts receivable-based line of credit or 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. Regardless of whether we secure continued passthrough payment for OMIDRIA, our working capital needs will likely continue to increase, particularly if the disruption to our operations caused by the COVID-19 pandemic continues. The conditions described above, when evaluated within the constraints of the accounting literature, raise substantial doubt with respect to our ability to meet our obligations through May ~~9, 2020~~11, 2021 and, therefore, to continue as a going concern.

We plan to continue to fund our operations through proceeds from sales of OMIDRIA and, ifin addition, we may utilize funds available under our accounts receivable-based line of credit, which allows us to borrow up to 85% of our available accounts receivable borrowing base or $50 million, whichever is less. Should it be necessary ~~through~~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 ~~revenue sources and financial instruments as noted above.~~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 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.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant items subject to such estimates include revenue recognition, stock-based compensation expense and accruals for clinical trials, manufacturing of drug product and clinical drug supply and other contingencies. We base our estimates on historical experience and on various other factors, including the impact of the COVID-19 pandemic, that we believe are reasonable under the circumstances; however, actual results could differ from these estimates.

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

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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 2018-07,~~ ~~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 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~~

Recently Adopted

Pronouncements

In June 2016, the Financial Accounting Standards Board ~~(FASB)~~ issued ASU 2016-13, Financial ~~Instruments —~~ Instruments—Credit Losses, (Topic 326) which changes how entities account for credit losses on most financial assets and certain other instruments and expands disclosures. The standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. We ~~expect to adopt~~adopted the standard on January 1, 2020 and ~~are still in~~ the ~~process of evaluating the effect of~~ adoption did not have a material impact on our consolidated financial statements and 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 three months ended March 31, ~~2019~~2020 and ~~2018~~2019 were computed based on the shares of common stock outstanding during the respective periods. Potentially dilutive securities excluded from the diluted loss per share calculation are as follows:


	March 31,
	2020	2019
Outstanding options to purchase common stock	12,591,341	11,840,521
Outstanding warrants to purchase common stock	243,115	243,115
Total potentially dilutive shares excluded from loss per share	12,834,456	12,083,636

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March 31,
2019 2018
Outstanding options to purchase common stock 11,840,521
9,640,452
Outstanding warrants to purchase common stock 243,115
100,602
Total potentially dilutive shares excluded from loss per share 12,083,636
9,741,054

Note 3—Certain Balance Sheet Accounts

Accounts Receivable, net

Accounts receivable, net consist of the following:

March 31,
2019 December 31,
2018
(In thousands)
Trade receivables, net $ 24,580
$ 22,654
Sublease and other receivables 138
164
Total accounts receivables, net $ 24,718
$ 22,818


	March 31,		December 31,
	2020		2019
	(In thousands)
Trade receivables, net	$	24,011	$	35,074
Sublease and other receivables		106		111
Total accounts receivables, net	$	24,117	$	35,185

Trade receivables are shown net of ~~$0.4~~$4.1 million and ~~$0.4~~$1.6 million of chargeback and product return allowances as of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, 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


	March 31,		December 31,
	2020		2019
	(In thousands)
Raw materials	$	91	$	91
Work-in-progress		394		338
Finished goods		726		718
Total inventory	$	1,211	$	1,147

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


	March 31,		December 31,
	2020		2019
	(In thousands)
Finance leases	$	5,496	$	5,474
Laboratory equipment		2,750		2,844
Computer equipment		921		921
Office equipment and furniture		625		625
Total cost		9,792		9,864
Less accumulated depreciation and amortization		(6,437)		(6,035)
Total property and equipment, net	$	3,355	$	3,829

For both the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, depreciation and amortization expenses were $0.4 ~~million and $0.2 million, respectively.~~million.

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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


	March 31,		December 31,
	2020		2019
	(In thousands)
Contract research and development	$	19,318	$	24,107
Sales rebates, fees and discounts		8,785		10,870
Interest payable		4,921		1,640
Consulting and professional fees		3,337		3,610
Employee compensation		2,772		3,546
Clinical trials		1,468		1,982
Other accrued expenses		778		872
Total accrued expenses	$	41,379	$	46,627

Note 4—Fair-Value Measurements

As of March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, 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:


	March 31, 2020
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Money-market funds classified as non-current restricted investments	$	1,154	$	—	$	—	$	1,154
Money-market funds classified as short-term investments		46,862		—		—		46,862
Total	$	48,016	$	—	$	—	$	48,016


	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Money-market funds classified as non-current restricted investments	$	1,154	$	—	$	—	$	1,154
Money-market funds classified as short-term investments		57,704		—		—		57,704
Total	$	58,858	$	—	$	—	$	58,858

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March 31, 2019
Level 1 Level 2 Level 3 Total
(In thousands)
Assets:
Money-market funds classified as non-current restricted cash and investments $ 1,154
$ —
$ —
$ 1,154
Money-market funds classified as short-term investments 43,168
—
—
43,168
Total $ 44,322
$ —
$ —
$ 44,322

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

Cash held in demand deposit accounts of ~~$4.1~~$7.1 million and ~~$5.9~~$3.1 million is excluded from our fair-value hierarchy disclosure as of March 31, ~~2019~~2020 and December 31, ~~2018~~,2019, respectively. There were no0 unrealized gains or losses associated with our short-term investments as of March 31, ~~2019~~2020 or December 31, ~~2018~~.2019. The carrying amounts reported in the accompanying Condensed Consolidated Balance Sheets for receivables, accounts payable, other current monetary assets and liabilities approximate fair value.

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

Note 5—~~Notes Payable~~

~~In October 2016, we entered into~~Debt

Line of Credit

We have a ~~term loan agreement with CRG Servicing LLC (the CRG Loan) and, in November 2016, borrowed $80.0 million. In May 2018, we borrowed the remaining $45.0 million available under the CRG~~ Loan and ~~issued warrants to purchase~~Security Agreement with Silicon Valley Bank, which provides for a $50.0 million revolving line of credit facility (the Line of Credit Agreement). Under the Line of Credit Agreement, we may draw, on a revolving basis, up to ~~200,000 shares~~the lesser of $50.0 million and 85.0% of our ~~common stock with an exercise price~~eligible accounts receivable, less certain reserves. Interest on amounts outstanding is payable monthly at the greater of ~~$23.00 per share.~~5.5% and the prime rate. The ~~warrants have a five-year term~~line of credit is secured by all our assets excluding intellectual property 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. development program inventories.

As of March 31, ~~2019~~2020 and December 31, ~~2018~~2019, we ~~did not have any notes payable outstanding.~~

had 0 outstanding borrowings under the Line of Credit Agreement.

Note 6—Convertible Senior Notes

~~On November 15, 2018, we issued at face value~~

We have $210.0 million aggregate principal amount ~~of our~~ 6.25% Convertible Senior Notes due 2023 (the Convertible Notes). The Convertible Notes are unsecured and accrue interest at an annual rate of 6.25% per annum, payable semi-annually in arrears on May 15 and November 15 of each ~~year, beginning~~year. The Convertible Notes mature on ~~May~~November 15, ~~2019.~~

2023, unless earlier purchased, redeemed or converted in accordance with their terms.

The Convertible Notes will be convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 52.0183 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $19.22 per share of common stock), subject to adjustment in certain circumstances. To reduce the dilutive impact or potential cash expenditure associated with conversion of the Convertible Notes, we entered into a capped call transaction which essentially covers the number of shares of our common stock underlying the Convertible Notes when our common stock is trading between the initial conversion price of $19.22 per share and $28.84 per share. As of March 31, ~~2019,~~2020, all Convertible Notes remain outstanding.

The balance of our Convertible Notes at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, is as follows:

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 more details on our~~


	March 31,		December 31,
	2020		2019
	(In thousands)
Principal amount	$	210,000	$	210,000
Unamortized discount		(45,329)		(47,660)
Unamortized issuance costs attributable to principal amount		(3,925)		(4,127)
Total Convertible Notes, net	$	160,746	$	158,213

The estimated fair value of the Convertible Notes ~~see Part II, Item 8, Note 8 - “Convertible Senior Notes” in our Annual Report on Form 10-K~~at March 31, 2020, as determined through consideration of quoted market prices, was $190.1 million. The fair value is classified as Level 3 due to the limited trading activity for the ~~year ended December 31, 2018.~~Convertible Notes.

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Note 7—~~Lease Liabilities~~

Leases

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.~~

~~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.~~

follows:


	March 31,		December 31,
	2020		2019
	(In thousands)
Assets
Operating lease assets	$	27,081	$	27,082
Finance lease assets, net		2,638		2,973
Total lease assets	$	29,719	$	30,055

Liabilities
Current:
Operating leases	$	2,391	$	2,282
Finance leases		1,206		1,222
Non-current:
Operating leases		30,125		30,772
Finance leases		1,271		1,546
Total lease liabilities	$	34,993	$	35,822

The components of total lease ~~costs~~cost 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


	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Lease cost
Operating lease cost	$	1,509	$	1,031
Finance lease cost:
Amortization		357		290
Interest		89		82
Short-term lease cost		—		138
Variable lease cost		542		486
Sublease income		(293)		(224)
Total lease cost	$	2,204	$	1,803

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


	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	2,136	$	1,647
Operating cash flows used for finance leases	$	89	$	82
Financing cash flows used for finance leases	$	313	$	254

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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 8—Commitments and Contingencies

Contracts

We have various agreements with third parties that would collectively require payment of termination fees totaling ~~$13.7~~$17.6 million if we had cancelled the work 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.~~

2020.

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. For the three months ended March 31, ~~2019~~2020 and ~~the year ended December 31, 2018,~~2019, development milestones ~~incurred~~ were ~~immaterial and we did~~insignificant. We do not owe any ~~royalties.~~

royalties on OMIDRIA.

Note 9—Shareholders’ Deficit

Common Stock

and Warrants

For the three months ended March 31, 2020, we received proceeds of $2.7 million upon the exercise of stock options which resulted in the issuance of 306,857 shares of common stock. For the three months ended March 31, 2019, we received proceeds of $0.1 million upon the exercise of stock options which resulted in the issuance of 10,744 shares of common stock. ~~For the three months ended~~

As of March 31, ~~2018,~~2020 and December 31, 2019, we ~~received proceeds of $0.7 million upon the exercise of stock options and~~had 243,115 warrants ~~which resulted in the issuance of 75,616 shares of common stock.~~

~~Warrants~~

~~In connection~~outstanding with ~~the April 2018 amendment to the CRG Loan 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~~a weighted average exercise price of ~~$23.00~~$20.68 per ~~share and total fair value of $1.4 million. The warrants have a five-year term and remain outstanding as of March 31, 2019.~~

share.

Interim Condensed Consolidated Statements of Shareholders’ Deficit

The changes in interim balances of the components of our shareholders’ deficit are as follows:


			Additional
	Common		Paid-In		Accumulated
	Stock		Capital		Deficit		Total
		(In thousands)
Balance January 1, 2020	$	542	$	625,048	$	(734,611)	$	(109,021)
Exercise of stock options		3		2,709		—		2,712
Stock-based compensation expense		—		3,476		—		3,476
Net loss		—		—		(29,031)		(29,031)
Balance March 31, 2020	$	545	$	631,233	$	(763,642)	$	(131,864)


			Additional
	Common		Paid-In		Accumulated
	Stock		Capital		Deficit		Total
		(In thousands)
Balance January 1, 2019	$	490	$	549,479	$	(650,125)	$	(100,156)
Exercise of stock options		—		108		—		108
Stock-based compensation expense		—		3,374		—		3,374
Net loss		—		—		(24,345)		(24,345)
Balance March 31, 2019	$	490	$	552,961	$	(674,470)	$	(121,019)

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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 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~~is as follows:

Three Months Ended
March 31,
2019 2018
(In thousands)
Research and development $ 1,494
$ 1,200
Selling, general and administrative 1,880

1,766
Total $ 3,374
$ 2,966


	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Research and development	$	1,447	$	1,494
Selling, general and administrative		2,029		1,880
Total	$	3,476	$	3,374

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

Three Months Ended
March 31,
2019 2018
Estimated weighted-average fair value $ 9.47

$ 9.79
Weighted-average assumptions

Expected volatility 81 %
76 %
Expected term, in years 6.0

6.1
Risk-free interest rate 2.48 %
2.54 %
Expected dividend yield — %
— %


	Three Months Ended
	March 31,
	2020
Estimated weighted-average fair value	$	7.89
Weighted-average assumptions:
Expected volatility		76	%
Expected term, in years		6.0
Risk-free interest rate		1.18	%
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, 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


		Weighted-
		Average			Aggregate
		Exercise		Remaining	Intrinsic
	Options	Price per		Contractual Life	Value
	Outstanding	Share		(In years)	(In thousands)
Balance at December 31, 2019	11,207,931	$	11.72
Granted	1,744,585		11.95
Exercised	(306,857)		8.84
Forfeited	(54,318)		15.04
Balance at March 31, 2020	12,591,341	$	11.81	6.4	$	26,173
Vested and expected to vest at March 31, 2020	12,116,956	$	11.75	6.3	$	25,838
Exercisable at March 31, 2020	8,261,407	$	11.03	5.0	$	23,067

At March 31, ~~2019,~~2020, there were ~~4,025,230~~4.3 million unvested options outstanding that will vest over a weighted-average period of ~~9.1~~2.9 years and ~~554,083~~3.7 million shares were available to grant. The total estimated compensation expense yet to be recognized on ~~our unvested~~outstanding options is ~~$15.6~~$32.9 million.In March 2020, annual stock option grants totaling approximately 1.6 million shares with an exercise price of $11.91 per share were granted to all eligible employees. The options vest monthly on a straight-line basis over four years.

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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 for use during cataract surgery or intraocular lens ~~or IOL,~~ replacement ~~to maintain pupil size by preventing intraoperative miosis (pupil constriction)~~for adult and ~~to reduce postoperative pain. In our pipeline we~~pediatric patients. We have multiple Phase 3 and Phase 2 clinical-stage development programs in our pipeline, which are focused on: ~~complement-associated~~complement-mediated disorders, including hematopoietic stem cell transplant-associated thrombotic ~~microangiopathies; complement-mediated glomerulonephropathies;~~microangiopathy (“HSCT-TMA”), Immunoglobulin A (“IgA”) nephropathy and ~~addictive and compulsive disorders.~~atypical hemolytic uremic syndrome (“aHUS”), as well as addiction. In addition, we have a diverse group of preclinical programs, ~~and two platforms: one capable~~including GPR174, a novel target in immuno-oncology that modulates a new cancer immunity axis that we recently discovered. Small-molecule inhibitors of ~~unlocking new~~GPR174 are part of our proprietary G protein-coupled receptor or(“GPCR”) platform through which we control 54 new GPCR drug targets and ~~the other used to generate antibodies. For~~their corresponding compounds. We also exclusively possess a novel antibody-generating platform. We have retained control of all commercial rights for OMIDRIA and each of our product candidates and programs.

Impact of Global Pandemic

The COVID-19 outbreak and the response of governmental authorities to try to limit its spread are having a significant impact on our ~~programs,~~business. On March 18, 2020, The American Academy of Ophthalmology issued a letter recommending that all ophthalmologists immediately cease providing any treatment other than urgent or emergent care. Upon this recommendation the ASCs and hospitals using OMIDRIA postponed nearly all cataract surgery. Consequently, our sales of OMIDRIA to our wholesalers have been minimal following the announcement, including throughout April. In early May, a large number of states began re-opening ASCs and hospitals to cataract surgery, and we have ~~retained control~~had facilities in at least 36 states initiate re-ordering of ~~all~~OMIDRIA from our wholesalers. The COVID-19 pandemic could have a continuing adverse impact on our business, operations and financial results, including through sustained limitation on cataract surgery and corresponding reduction in demand for OMIDRIA, disruptions in commercial ~~rights.~~

sales activities, higher than normal volume of OMIDRIA product returns, delays or disruptions with respect to manufacturing of clinical or commercial supply, delays in our clinical trials or in the submission or review of regulatory applications, as well as deterioration of general economic conditions. Due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, it is not possible to estimate precisely its impact on our business, operations or financial results; however, the impact could be material.

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

OMIDRIA is approved by the FDA for use during cataract surgery or ~~IOL~~intraocular lens replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative ocular pain. Outside of the U.S., we have received approval from the European Commission ~~or EC,~~(“EC”) to market OMIDRIA in the European Economic Area ~~or EEA,~~(“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 a proprietary drug product containing two active pharmaceutical ~~ingredients, or APIs:~~ingredients: 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

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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~~ambulatory surgery centers (“ASCs”) and hospitals. The Centers for Medicare & Medicaid Services ~~or CMS,~~(“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., outside the packaged payment 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 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,~~through September 30, 2020.

We ~~also~~ continue to pursue permanent separate reimbursement for ~~OMIDRIA. In~~OMIDRIA beyond the ~~2019 final rule~~currently scheduled expiration of pass-through reimbursement. CMS is required under the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act to review payments under its CMS’ outpatient prospective payment system or(“OPPS”) for opioids and evidence-based non-opioid alternatives for pain management with a goal to ensure that there are not financial incentives to use opioids instead of non-opioid alternatives. In its 2020 OPPS proposed rule, CMS ~~indicated~~noted that ~~in the ASC setting, it will separately pay for certain~~ non-opioid drugs ~~used during surgery~~ that ~~have an FDA-approved indication~~are indicated for ~~postoperative~~reduction of post-operative pain ~~relief~~may warrant separate payment if there is evidence to show packaged payment presents a demonstrated barrier to access for such drugs and ~~are currently packaged~~that such drugs help to deter or avoid prescription opioid use and addiction. Although Omeros provided CMS with ~~the procedure in calendar year 2019. Although OMIDRIA is not specifically named because~~evidence that it ~~currently is paid separately, we believe~~believes shows that OMIDRIA meets ~~this definition and would qualify for~~these criteria, CMS declined in its 2020 OPPS final rule to confirm separate payment ~~under this provision if~~to OMIDRIA beyond the expiration of its current pass-through status on September 30, 2020. CMS also noted in the 2020 OPPS final rule that it ~~is continued in 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~~continue to ~~address postoperative issues.~~analyze evidence and monitor utilization of OMIDRIA. We ~~believe that OMIDRIA also meets this definition. We are continuing~~continue to ~~confirm these beliefs~~generate evidence and intend to ~~pursue other~~continue pursuing administrative and legislative avenues ofto secure permanent separate payment or similar reimbursement for OMIDRIA beyond September 30, ~~2020 but~~2020; however, 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.~~ For more information regarding OMIDRIA reimbursement, see ~~“Results of Operations”~~“Financial Summary” below.

In July 2018, we ~~reported that~~placed OMIDRIA ~~had been placed~~ on the market in the European Union ~~or EU,~~(“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.~~ At this time, we do not expect to see significant sales of OMIDRIA in any countries within the EEA or

other international territories. We have an exclusive supply and distribution agreement with ITROM Trading Drug Store, or ITROM, for the sale of OMIDRIA in 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.

Clinical Development Programs

Our clinical stage development programs include:

~~MASP-2 - narsoplimab (OMS721) - Lectin Pathway Disorders~~.

●

MASP-2 - 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 our lead human monoclonal antibody targeting mannan-binding lectin-associated serine protease-2 (MASP-2), 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, and the current development focus for narsoplimab is diseases in which the lectin pathway has been shown to contribute to significant tissue injury and pathology. When not treated, these diseases are typically characterized by significant end organ injuries, such as kidney or central nervous system injury.

We have completed our pivotal clinical trial for narsoplimab in HSCT-TMA, and Phase 3 clinical programs are ~~underway~~in process for narsoplimab ~~in: hematopoietic stem cell transplant-associated thrombotic microangiopathy, or HSCT-TMA; Immunoglobulin A, or~~in IgA ~~nephropathy;~~nephropathy and ~~atypical hemolytic uremic syndrome, or~~ aHUS. ~~In addition, we have an ongoing Phase 2 clinical trial evaluating narsoplimab in renal diseases, currently focused on patients with IgA nephropathy.~~

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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 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 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.

In October 2019, we initiated the ~~U.S., the~~rolling submission to FDA ~~has granted narsoplimab (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 narsoplimab a designation as an orphan medicinal product for treatment in hematopoietic stem cell transplantation.

~~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 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 with the FDA and with multiple European national regulatory authorities to discuss potential approval pathways for narsoplimab for the treatment of ~~HSCT-TMA. Feedback from the European national regulatory authorities has been positive, and includes uniform support~~HSCT-TMA, a frequently lethal complication of HSCT. A rolling submission enables us to submit ~~an MAA for full~~sections of the BLA as they are completed, which can accelerate the time to approval ~~of narsoplimab in HSCT-TMA. We recently met with~~by allowing FDA to ~~finalize endpoints~~review completed sections of the application as they are submitted rather than waiting for the entire BLA to be ~~used~~submitted before beginning its review. The initial submission to FDA included all of the nonclinical (i.e., pharmacology, pharmacokinetics and toxicology) data, study reports, overview and summaries for ~~approval and we are collecting the additional clinical data needed for marketing applications. We have already written~~ the nonclinical sections of the BLA. We have also successfully completed the manufacturing of the required process validation lots of narsoplimab and submitted the second part of the BLA containing information related to the chemistry, manufacturing and controls (“CMC”) for narsoplimab. The clinical sections and additional CMC information for the BLA are ~~discussing with FDA the final schedule~~being prepared for ~~a rolling BLA submission. We also plan to request a meeting with the rapporteur and co-rapporteur in Europe, who will work with us through the MAA~~ submission and, ~~review process for~~once all CMC and clinical data collection and analyses are complete and compiled, these remaining parts of the BLA will be submitted.

On March 2, 2020, we reported clinical data from our pivotal trial of narsoplimab in HSCT-TMA. ~~We have already applied~~The single-arm, open-label trial included safety and efficacy endpoints that were previously agreed to with FDA. These endpoints were assessed for (1) all 28 patients who received at least one dose of narsoplimab and (2) patients who received the protocol-specified dosing of at least four weeks of narsoplimab.

The primary efficacy endpoint in the trial was the proportion of patients who achieved designated “responder” status based on improvement in HSCT-TMA laboratory markers and clinical status. This is referred to as the “complete response rate.” The primary laboratory markers that were evaluated were platelet count and lactate dehydrogenase (“LDH”), levels, while improvement in clinical status was evaluated based on organ function and transfusions. Patients who did not fully meet these criteria were considered “non-responders.”

The FDA-agreed efficacy threshold for the primary endpoint is a complete response rate of 15%. Among patients who received at least one dose of narsoplimab, the complete response rate was 54% (p<0.0001), while the complete response rate among patients who received the protocol-specified narsoplimab treatment of at least four weeks of dosing was 65% (p<0.0001).

Secondary endpoints in the trial were survival rates and change from baseline in HSCT-TMA laboratory markers. Among the responder population, 93% of patients survived for at least 100 days following HSCT-TMA diagnosis, while 83% of patients who received treatment for at least four weeks and 68% of the total treated population achieved this endpoint. Results also included statistically significant improvements in platelet count, LDH and haptoglobin. The treated population had multiple high-risk features that portend a poor outcome, including the persistence of HSCT-TMA despite modification of immunosuppression (which was a criterion for entry into the trial), graft-versus-host disease, significant infections, non-infectious pulmonary complications and neurological findings. Patients in the trial had a high expected mortality rate, with 93% of

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them having multiple risk factors. The most common adverse events observed in the trial were nausea, vomiting, diarrhea, hypokalemia, neutropenia and fever, which are all common in stem-cell transplant patients. Six deaths occurred during the trial. These were due to sepsis, progression of the underlying disease, and graft-versus-host disease. All of these are common causes of death in this patient population.

In Europe, EMA has confirmed narsoplimab’s eligibility tofor 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 EEA ~~countries rather than requiring separate national approvals.~~countries. We ~~are finalizing~~plan to complete the submission of an MAA after our ~~Pediatric Investigational Plan~~BLA submission has been filed with FDA. In October 2019 we received a positive opinion from EMA on our pediatric investigation plan (“PIP”) for narsoplimab in ~~Europe, which is~~the treatment of HSCT-TMA. A PIP outlining a development program for the investigational product in the pediatric population must be agreed with EMA as a prerequisite ~~for submission~~to EMA’s acceptance of an MAA. The narsoplimab PIP provides a study plan to evaluate the safety and effectiveness of the ~~MAA as we continue preparations~~drug for ~~U.S. BLA and European MAA submissions.~~HSCT-TMA in patients from one month through 17 years of age. We ~~were also notified by FDA that FDA and EMA held~~received a ~~joint meeting at which harmonization~~deferral for completion of our PIP until after approval of the ~~pediatric development of~~ narsoplimab ~~for stem-cell TMA was specifically discussed.~~

MAA.

In our IgA nephropathy program, patient enrollment continues in the narsoplimab Phase 3 clinical trial, ARTEMIS-IGAN. The single Phase 3 trial design is 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~~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 we believe could suffice for full or accelerated approval depending on the effect size, is reduction in 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 will include a subset of patients with high levels of proteinuria (i.e., equal to or greater than 2 g/day) at baseline, and a substantial improvement at 36 weeks in this subset of patients alone could potentially form the basis for approval. We believe that the trial design will allow assessment for either full or accelerated approval at 36 weeks based on proteinuria results either (1) across the general population of study patients or (2) in the high-proteinuria subset of patients.

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 in the U.S.

●

PDE7 - OMS527. In our phosphodiesterase 7 (PDE7) program, we are developing proprietary compounds to treat addiction and compulsive disorders as well as movement disorders. In September 2019 we reported positive results from our Phase 1 single-ascending- and multiple-ascending-dose clinical trial designed to assess safety, tolerability and pharmacokinetics of our lead compound in healthy subjects.

~~PDE7 - OMS527~~.

In ~~our phosphodiesterase 7, or PDE7, program,~~the double blind, randomized Phase 1 study, the study drug, referred to as OMS182399, met the primary endpoints of safety and tolerability and showed a favorable and dose-proportional pharmacokinetic profile supporting once-daily dosing. There was no apparent food effect on plasma exposure to OMS182399. Our focus is nicotine addiction, and we are ~~developing proprietary compounds to treat addiction and compulsive disorders as well as movement disorders. A~~planning our Phase 1 single-ascending- and multiple-ascending-dose clinical trial is underway and is designed to assess safety and pharmacokinetics of our lead compound in healthy subjects. We have completed dosing in all six cohorts in the single-ascending-dose portion of 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 second or third quarter of 2019. Following Phase 1 completion, if successful, we plan to conduct a Phase 2a study targeting nicotine addiction.

2 development program.

Preclinical Development Programs and Platforms

Our preclinical programs and platforms include:

●

MASP-3 - OMS906 - Alternative Pathway Disorders. As part of our MASP program, we have identified mannan-binding lectin-associated serine protease-3 (“MASP-3”), which has been shown to be the key activator of the complement system’s alternative pathway (“APC”), and 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

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~~MASP-3 - OMS906 - Alternative Pathway Disorders. As part~~

Table of ~~our complement target program, we have identified mannan-binding lectin-associated serine protease-3, or MASP-3, which has been shown to be the key activator~~Contents

responsible for the conversion of pro-factor D to factor D; 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 APC. We believe that MASP-3 inhibitors have the potential to treat patients suffering from a wide range of diseases and conditions, including: paroxysmal nocturnal hemoglobinuria (“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 monoclonal antibody program has generated positive data in a well-established animal model associated with PNH, as well as strong pharmacodynamic activity in non-human primates. The program has also generated positive data in a well-established animal model of arthritis. In preparation for clinical trials, we have completed the first-in-human-enabling toxicology studies, and the manufacturing scale-up process is underway to support the remainder of the development program. We are currently targeting PNH as the first clinical indication for OMS906 and plan to submit a clinical trial application in 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 a longer-acting second generation antibody targeting MASP-2, which we are targeting for initiation of clinical trials in 2022. This program is designated as “OMS1029.” Development efforts are also directed to a small-molecule inhibitor of MASP-2 designed for oral administration, as well as small-molecule inhibitors of MASP-3 and biospecific small- and large-molecule inhibitors of MASP-2/-3.

●

GPR174 and GPCR Platform. We have developed a proprietary cellular redistribution assay 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 have screened Class A orphan GPCRs against our small-molecule chemical libraries using the cellular redistribution assay and have identified and confirmed compounds that interact with 54 of the 81 Class A orphan GPCRs linked to a wide range of indications including cancer as well as metabolic, cardiovascular, immunologic, inflammatory and central nervous system disorders. One of our priorities in this program is GPR174, which is involved in the modulation of the immune system. In ex vivo human studies, our small-molecule inhibitors targeting GPR174 upregulate the production of cytokines, block multiple checkpoints and tumor promoters, and suppress regulatory T-cells. 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 tumors. Our studies in mouse models of melanoma and colon carcinoma found that GPR174-deficiency resulted in significantly reduced tumor growth and improved survival of the animals versus normal mice. Our recent discoveries suggest a new approach to cancer immunotherapy that targets inhibition of GPR174 and can be combined with and significantly improve the tumor-killing effects of adenosine pathway inhibitors. These discoveries include (1) identification of cancer-immunity pathways controlled by GPR174, (2) the identification of phosphatidylserine as a natural ligand for GPR174, (3) a collection of novel small-molecule inhibitors of GPR174 and (4) a synergistic enhancement of “tumor-fighting” cytokine production by T cells following the combined inhibition of both GPR174 and the adenosine pathway (e.g., A2A and/or A2B), another key metabolic pathway that regulates tumor immunity. We continue to focus on GPR174 and several other of our GPCR targets with the objective of moving compounds targeting them into human trials.

Financial Summary

We recognized net losses of ~~the complement system’s alternative pathway, or APC. We believe that we are the first to make this~~$29.0 million 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$24.3 million 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 APC. We believe that MASP-3 inhibitors have the potential to treat patients suffering from a wide range of 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 arthritis. In preparation for clinical trials, the manufacturing scale-up process is underway for a MASP-3 inhibitor antibody and we are currently targeting PNH as the first clinical indication for OMS906. Nonclinical human-dose-enabling studies are planned for this year and we anticipate clinical trials to begin in 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-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 and GPR161, which is associated with triple negative breast cancer and various sarcomas. ~~One of our priorities in this program is GPR174. In~~ ~~ex vivo~~ ~~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 objective of moving compounds targeting them into human trials as rapidly as possible.

~~Financial Summary~~

~~For~~ the three months ended March 31, ~~2019~~2020 and ~~2018, we recognized net losses of $24.3 million and $30.1 million,~~2019, respectively and our OMIDRIA revenues were ~~$21.8~~$23.5 million and ~~$1.6~~$21.8 million ~~respectively,~~ for the same periods. ~~During the period from January 1, 2018 to September 30, 2018, OMIDRIA was not reimbursed separately when used~~As of March 31,

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2020, we had $54.0 million in cash and cash equivalents and short-term investments available 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 forgeneral corporate use ~~of OMIDRIA during procedures performed on Medicare Part B fee-for-service patients. See “Commercial Product - OMIDRIA” earlier~~and $24.1 million in ~~this section for additional details regarding the pass-through reimbursement status for OMIDRIA.~~

* Fiscal quarters without pass-through reimbursement.

accounts receivable, net.

We expect 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 operating expenses ~~capital expenditures~~ and debt service obligations.

*Fiscal quarters without pass-through reimbursement.

During the period from January 1, 2018 to September 30, 2018, OMIDRIA was not reimbursed separately when used for procedures involving patients covered by Medicare Part B and our revenues decreased significantly. After reinstatement of ~~March 31, 2019,~~separate reimbursement for OMIDRIA in 4Q 2018, our revenues quickly returned to levels when separate reimbursement was available and quarter-over-quarter revenue growth approximated historical rates. In Q1 2020, OMIDRIA revenues declined due to the impact of COVID-19 on the volume of cataract surgery being performed.

Pass-through status for OMIDRIA is scheduled to expire on September 30, 2020. If we ~~had $47.2 million~~are unable to obtain permanent separate or similar reimbursement for OMIDRIA, the net revenues we receive for OMIDRIA would be reduced, potentially by a significant amount. Although we expect to pursue an alternative sales strategy if we are unable to obtain permanent separate or similar reimbursement for OMIDRIA, we may face difficulties or delays in ~~cash~~implementing such a strategy and, ~~cash equivalents~~even if successfully implemented, we cannot predict whether or to what extent our customers would increase their utilization of OMIDRIA. See “Commercial Product - OMIDRIA” earlier in this section for additional details regarding the pass-through reimbursement status for OMIDRIA.

Due to the ongoing impact of COVID-19 on OMIDRIA sales and ~~short-term investments available for general corporate use and $24.7 million in accounts receivable,~~the scheduled expiration of pass-through status on September 30, 2020, we are unable to predict future OMIDRIA product sales, net.

Results of Operations

Revenue

Our revenue consists of OMIDRIA product sales to ~~ambulatory surgery centers, or~~ ASCs and hospitals in the U.S. Our product sales, net during the three months ended March 31, 2020 and 2019 are as follows:

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

During the three months ended March 31, ~~2019,~~2020, OMIDRIA revenue was ~~$21.8~~$23.5 million as compared to ~~$1.6~~$21.8 million for the three months ended March 31, ~~2018.~~2019. The increase in revenue during the three months ended March 31, ~~2019~~2020 compared to the same period in prior year was due to ~~significantly~~ increased demand for OMIDRIA by ASCs and hospitals following the reinstatement of ~~transitional~~ pass-through reimbursement status for OMIDRIA on October 1, 2018.

~~We anticipate~~ However, revenue for the three months ended March 31, 2020 was negatively affected as a result of inventory utilization by ASCs and hospitals in early March in anticipation of the COVID-19-related shutdown of elective surgical procedures. Sales of OMIDRIA were minimal following the postponement of most cataract procedures in mid-March. Revenue for the three months ended March 31, 2020 includes a $2.5 million provision for the potential return of OMIDRIA product. In early May, a large number of states began re-opening ASCs and hospitals to cataract surgery, and we have had facilities in at least 36 states initiate re-ordering of OMIDRIA from our wholesalers. In the event that ~~OMIDRIA~~ongoing customers return product and subsequently repurchase, those sales ~~net,~~ will ~~continue to increase during 2019 but we are unable to predict with precision~~be recorded as revenue when the ~~magnitude of those increases at~~wholesaler acquires the ~~current time due to the recent reinstatement of pass-through status for OMIDRIA.~~

replacement product from us.

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 months ended March 31, ~~2019~~2020 was ~~27.0%~~32.3% of gross OMIDRIA product sales. This compares to ~~28.9%~~27.0% for the three months ended March 31, ~~2018.~~2019. The ~~primary reason for the decrease~~increase in 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 increase slightly from the three months ended March 31, 2019 during the remainder of 2019.

product return allowances as described below.

A summary of our gross-to-net related accruals for the three months ended March 31, ~~2019~~2020 is as follows:

Chargebacks and Rebates Distribution Fees and Product Return Allowances Total
(In thousands)
Balance as of December 31, 2018 $ 7,015

$ 1,485

$ 8,500
Provisions 6,828

1,246

8,074
Payments (6,903 )
(1,119 )
(8,022 )
Balance as of March 31, 2019 $ 6,940

$ 1,612

$ 8,552


			Distribution
			Fees and
			Product
	Chargebacks		Return
	and Rebates		Allowances		Total
	(In thousands)
Balance as of December 31, 2019	$	10,240	$	2,237	$	12,477
Provisions		7,563		3,675		11,238
Payments		(9,556)		(1,266)		(10,822)
Balance as of March 31, 2020	$	8,247	$	4,646	$	12,893

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, a ~~Federal~~federal supply schedule agreement, a 340B prime vendor agreement, ~~and~~ a Medicaid drug rebate ~~agreement.~~agreement and an off-invoice discount to our ASC and hospital customers. We also record a provision for ~~estimated rebates for~~ our OMIDRIAssure^®patient assistance and reimbursement services program and our rebates under our purchase 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. For the three months ended March 31, 2020, as noted above, we recorded a $2.5 million return allowance for return of OMIDRIA product from wholesalers and ASCs related to the postponement of cataract surgeries due to the COVID-19 pandemic. Additionally, should pass-through reimbursement expire on September 30, 2020, it is possible

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that wholesalers, ASCs and hospitals may return a portion of their OMIDRIA on hand for a full refund of the purchase price. If a reserve is required, we would record the reserve during our third quarter of 2020.

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 prior to receiving regulatory approval for a product candidate, contract research organizations, ~~or CROs,~~ clinical trial sites, collaborators, consultants, and ~~lab supplies.~~licensors consultants. 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
March 31,
2019 2018
(In thousands)
Direct external expenses:
Clinical research and development:
MASP-2 Program - OMS721 (narsoplimab) $ 14,437
$ 7,929
OMIDRIA - Ophthalmology 708
609
PDE7 - OMS527 991

—
Other clinical programs 375
210
Total clinical research and development 16,511
8,748
Preclinical research and development 726
1,632
Total direct external expenses 17,237
�� 10,380

Internal, overhead and other expenses 7,524
6,560
Stock-based compensation expense 1,494

1,200
Total research and development expenses $ 26,255
$ 18,140


	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Direct external expenses:
Clinical research and development:
MASP-2 Program - OMS721 (narsoplimab)	$	13,215	$	14,437
OMIDRIA - Ophthalmology		626		708
PDE7 - OMS527		1,337		576
Total clinical research and development		15,178		15,721
Preclinical research and development		3,515		1,516
Total direct external expenses		18,693		17,237
Internal, overhead and other expenses		8,771		7,524
Stock-based compensation expense		1,447		1,494
Total research and development expenses	$	28,911	$	26,255

Direct external expenses increased $1.5 million for the three months ended March 31, 2020 compared to the same period in 2019. This increase is due primarily to higher IgA nephropathy clinical trial costs offset by lower narsoplimab manufacturing cost. In the first quarter of 2019 we acquired raw materials used in the manufacturing of our drug substance validation batches that concluded later in the year 2019. The ~~$6.9~~$2.0 million increase in ~~direct external~~our preclinical research and development expense for the three months ended March 31, 2020 as compared to the same period in 2019 reflects addition third-party manufacturing scale up costs related to our OMS906 program as well as development and analytical activities related our MASP-2 long-acting second-generation antibody program.

The increases in internal, overhead and other expenses for the three months ended March 31, ~~2019,~~2020 compared to the ~~same~~prior year period in 2018, was due primarily to higher third-party manufacturing scale-up costs for our narsoplimab program as we continue to increase our production capacity to meet anticipated clinical and commercial requirements, and the inclusion of clinical costs associated with the initiation of a Phase 1 clinical trial for OMS527, our PDE7 program for addiction and compulsive disorders. The decline in direct external expenses related to our preclinical development expense reflects the advancement of OMS527 into clinical research and development while maintaining similar level of expenditures related to our pre-clinical programs.

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

~~The~~

We expect the majority of our research and development expenses for the remainder of ~~2019 are anticipated to~~2020 will be related to our narsoplimab program. We expect research and development costs to increase ~~throughout 2019~~in 2020 as we ~~continue our Phase 3 clinical programs for narsoplimab and~~ incur incremental manufacturing ~~scale-up~~ costs ~~and other expenses as we continue preparations~~in preparation for the anticipated ~~submission of marketing applications for narsoplimab in HSCT-TMA and the potential commercialization~~commercial launch 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 product candidates and programs.

At this time, we are unable to estimate with 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.~~activities as well as the potential impacts of the COVID-19 pandemic. Clinical development timelines, the probability of success and development costs can differ materially as new data become available and as expectations change. Our future research and development expenses will depend, in part, on the preclinical or clinical success of each

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product candidate as well as ongoing assessments of each program’s commercial potential. In addition, we cannot forecast with 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.

Selling, General and Administrative Expenses

Three Months Ended
March 31,
2019 2018
(In thousands)
Selling, general and administrative expenses, excluding stock-based compensation expense $ 12,752
$ 9,168
Stock-based compensation expense 1,880

1,766
Total selling, general and administrative expenses $ 14,632
$ 10,934


	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Selling, general and administrative expenses, excluding stock-based compensation expense	$	16,007	$	12,752
Stock-based compensation expense		2,029		1,880
Total selling, general and administrative expenses	$	18,036	$	14,632

The increase in selling, general and administrative expenses during the three months ended March 31, ~~2019~~2020 compared to the same period in ~~2018~~2019 was primarily due to increased pre-commercialization marketing activities for narsoplimab, ~~sales and marketing~~including employee-related costs ~~related to the 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.~~

fees.

We expect that our selling, general and administrative expenses will increase ~~slightly~~ in the remaining quarters of ~~2019~~2020 compared to current levels, primarily due to increased pre-commercialization activities for narsoplimab.

Interest Expense

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

~~The increase in~~

Interest expense is comprised of interest ~~expense during the three months ended March 31, 2019 compared~~related to ~~the same periods in the prior year was primarily due to the issuance, in November 2018, of~~our $210.0 million ~~aggregate principal amount~~ of ~~our~~ 6.25% Convertible Senior Notes due 2023 ~~or the Convertible Notes.~~(the “Convertible Notes”). Non-cash interest expense for the three months ended March 31, 2020 and 2019 ~~and 2018~~ was ~~$2.2~~$2.5 million and ~~$1.1~~$2.2 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 year ended December 31, ~~2018.~~

2019.

Financial Condition - Liquidity and Capital Resources

~~For the three months ended~~

As of March 31, 2019, we generated net losses of $24.3 million and incurred negative cash flows from operations of $12.9 million compared to $30.1 million and $11.3 million, respectively, for the three months ended March 31, 2018. As of ~~March 31, 2019~~,2020, we had ~~$47.2~~$54.0 million in cash, cash equivalents and short-term investments available for general corporate use ~~that are~~ held ~~principally~~primarily in money-market accounts as compared to ~~$60.5~~$60.8 million at December 31, ~~2018. Our~~2019. In addition, as of March 31, 2020, we had $24.1 million in accounts receivable, ~~balance at~~net. We have historically generated net losses and incurred negative cash flows from operations and debt service. For the three months ended March 31, ~~2019 was $24.7~~2020, we incurred net losses of $29.0 million and ~~we had $44.5 million~~incurred negative cash flows from operations of ~~current liabilities outstanding at March 31, 2019.~~

~~As described earlier~~$9.1 million.

In the first quarter of 2020, our business operations and liquidity were negatively affected by the reduction in ~~this section under “Commercial Product~~ — ~~OMIDRIA”, pass-through status~~demand for OMIDRIA ~~allows for separate reimbursement payment (i.e.,~~ ~~outside~~caused by restrictions on cataract surgeries implemented in response to the ~~packaged procedural payment)~~COVID-19 pandemic. The ongoing restrictions are expected to continue to negatively impact working capital in the second quarter and possibly in future periods, with the magnitude of the impact being dependent on the duration and extent of applicable limitations on the operations of our ASC and hospital customers.

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In early May, a large number of states began re-opening ASCs and hospitals ~~using~~to cataract surgery, and we have had facilities in at least 36 states initiate re-ordering of OMIDRIA ~~in procedures involving patients covered by Medicare Part B.~~from our wholesalers. However, we cannot yet predict with certainty the levels of OMIDRIA ~~has been granted~~product sales we will achieve. In addition, pass-through reimbursement ~~through~~for OMIDRIA is currently scheduled to expire on September 30, 2020.

We ~~continue~~are pursuing legislative and administrative means to ~~advance a series of clinical and preclinical programs (including three programs currently in Phase 3). We believe OMIDRIA sales will continue~~extend permanent reimbursement but have not yet received such an extension. Consequently, we are unable to grow in 2019; however, we cannot predict with precision the extent of growth in OMIDRIA revenues in 2019. As a result, despite the significant quarterly revenue growth in OMIDRIA sales prior to the loss of OMIDRIA pass-through reimbursement December 31, 2017, meaningful growth in OMIDRIA sales in 2019 and beyond, are not includedinclude in the determination regarding our prospects as a going ~~concern. Similarly, we are unable to include in~~concern OMIDRIA revenues and amounts available under the ~~determination~~Line of Credit Agreement, as borrowing availability is determined based on eligible OMIDRIA accounts receivable. We have also not included any proceeds from debt transactions or other financing instruments, despite our successful track record in accessing capital through each of these ~~avenues. We also have not included~~avenues nor any potential partnerships related to our products or product candidates. The conditions described above when evaluated within the constraints of the accounting literature raise substantial doubt with respect to our ability to meet our obligations through May ~~9, 2020~~11, 2021 and, therefore, to continue as a going concern.

We plan to continue to fund our operations through proceeds from sales of ~~OMIDRIA.~~OMIDRIA after the postponement of non-urgent ophthalmic surgical procedures, including cataract surgery, ends and, in addition, we may utilize funds available under our receivable-based line of credit to the extent it is available to us. Should it be necessary or ~~determined~~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 our expenses by delaying clinical trials, reducing selected research and development efforts, and/or implementing other restructuring activities.

Cash Flow Data

Three Months Ended
March 31,
2019 2018
(In thousands)
Selected cash flow data
Cash provided by (used in):
Operating activities $ (12,948 ) $ (11,296 )
Investing activities 11,287
8,547
Financing activities (146 ) 544


	Three Months Ended March 31,
	2020		2019
	(In thousands)
Selected cash flow data
Cash provided by (used in):
Operating activities	$	(9,141)	$	(12,948)
Investing activities	$	10,776	$	11,287
Financing activities	$	2,399	$	(146)

Operating Activities. Net cash used in operating activities for the three months ended March 31, ~~2019 increased~~2020 decreased by ~~$1.7~~$3.8 million as compared to the same period in ~~2018.~~2019. The net decrease is primarily due to a $13.0 million increase in cash provided from collections of accounts receivable offset by an increase in our net loss of $4.7 million, an increase of $4.0 million in cash used in ~~operating activities in the current period compared to the prior year resulted from a $18.9~~accounts payable and accrued expense, and an increase of $1.5 million ~~decrease in funds provided from to the collection of accounts~~

receivable, and a $0.8 million used in the acquisition of OMIDRIA inventory. This increase in cash used in operating activities was mostly offset by a $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 by accounts payable and accrued expenses.~~

payments.

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 from investing activities to be important to the understanding of our liquidity and capital resources.

Net cash provided by investing activities during the three months ended March 31, ~~2019~~2020 was ~~$11.3~~$10.8 million, a ~~change~~decrease of ~~approximately $2.7~~$0.5 million ~~from the $8.5 million net cash provided by investing activities~~ for the same period in ~~2018. Investments~~2019 primarily due to investments purchased exceeding investments sold ~~increased~~ by ~~$2.8 million during the three months ended March 31, 2019 compared to the same period in 2018 to provide cash to fund our operations.~~

$0.6 million.

Financing Activities. Net cash ~~used in~~provided by financing activities during the three months ended March 31, ~~2019~~2020 was ~~$0.1~~$2.4 million, ~~a decrease~~an increase of ~~$0.7~~$2.5 million compared to the same period in ~~2018.~~2019. The ~~decrease in net cash provided by financing activities~~increase for the three months ended March 31, ~~2019~~2020 compared to the prior year was primarily due to ~~a decrease of~~$2.7 million in net proceeds from ~~the exercise~~exercises of stock ~~options~~options.

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Loan and ~~an increase~~Security Agreement. Our Loan and Security Agreement with Silicon Valley Bank (the “Loan Agreement”), provides for a $50.0 million revolving line of credit facility. Under the Loan Agreement we may draw, on a revolving basis, up to the lesser of $50.0 million and 85.0% of our eligible accounts receivable, less certain reserves. The Loan Agreement is secured by all our assets excluding intellectual property and development program inventories and matures on August 2, 2022. As of March 31, 2020, we had no outstanding borrowings under the Loan Agreement and we were in ~~principal payments on finance leases.~~

compliance with all covenants in all material respects. See earlier discussion under “Liquidity and Capital Resources” for further detail regarding the availability of the line of credit.

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, ~~2018.~~2019. Other than the following, our future minimum contractual obligations and commitments have not changed materially from the amounts previously reported.

Goods &and Services

We have certain non-cancelable obligations under various other agreements for the acquisition of goods and services associated with the manufacturing of our product candidates that contain firm commitments. As of March 31, ~~2019,~~2020, our aggregate firm commitments are ~~$13.7~~$17.6 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~~lease our office and laboratory space in The Omeros ~~Building.~~Building under a lease agreement with BMR - 201 Elliott Avenue LLC. The initial term of the ~~leases is through~~lease ends in 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~~As of March 31, ~~2019.~~

2020, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $51.4 million.

Critical Accounting Policies and Significant Judgments and Estimates

There have not been any material changes in our critical accounting policies and significant judgments and estimates 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, ~~2018, except for the 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~~.

2019.

Off-Balance Sheet Arrangements

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is primarily confined to our investment ~~securities and notes payable.~~securities. 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 March 31, ~~2019~~,2020, we had cash, cash equivalents and short-term investments of ~~$47.2~~$54.0 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 March 31, ~~2019~~.2020. 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 March 31, ~~2019~~,2020, 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.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.

ITEM 1A. RISK FACTORS

We operate in an environment that involves a number of risks and uncertainties. Before making an investment decision you should carefully consider the risks described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the SEC on March ~~1, 2019.~~2, 2020. In assessing the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, 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. 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.

~~There has not been a material change to~~

The risk factors set forth below update, and should be read together with, the risk factors ~~as set forth~~described in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Our ability to achieve profitability is highly dependent on the commercial success of OMIDRIA, and 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 March 31, 2020, we recorded net sales of OMIDRIA of $23.5 million. Revenues from sales of OMIDRIA have not been sufficient to fund our operations fully in prior periods and we cannot provide assurance that revenues from OMIDRIA sales will be sufficient to fund our operations fully in the future. We will need to generate substantially more product revenue from OMIDRIA to achieve and sustain profitability. We may be unable to sustain or increase revenues generated from OMIDRIA product sales for a number of reasons, including:

●

the significant reduction in the volume of ophthalmic surgical procedures and corresponding reduction in demand for OMIDRIA as a result of the COVID-19 pandemic;

●

the scheduled expiration of pass-through reimbursement on September 30, 2020 and uncertainty regarding the extent of coverage and reimbursement for OMIDRIA when used in Medicare patients after September 30, 2020;

●

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;

●

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

●

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

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Any decline in sales from OMIDRIA also would impact our ability to borrow under the Loan Agreement since the amount we can borrow is dependent on our eligible receivables.

The spread of COVID-19 and efforts to reduce its transmission may negatively impact our business, operations and financial results.

The spread of COVID-19 and efforts to reduce its transmission have significantly affected the global economy and have adversely affected our sales of OMIDRIA due to a reduction in the overall volume of cataract surgery and intraocular lens replacement procedures. On March 18, 2020, The American Academy of Ophthalmology issued a letter recommending that all ophthalmologists immediately cease providing any treatment other than urgent or emergent care. Upon this recommendation the ASCs and hospitals using OMIDRIA temporarily postponed nearly all cataract surgery. Consequently, our sales of OMIDRIA have been minimal to our wholesalers following the announcement. In early May, a large number of states began re-opening ASCs and hospitals to cataract surgery, and we have had facilities in at least 36 states initiate re-ordering of OMIDRIA from our wholesalers. The COVID-19 pandemic could have a continuing adverse impact on our business and financial results, including through sustained limitation on cataract surgery and corresponding reduction in demand for OMIDRIA, disruptions in commercial sales activities, higher than normal volume of OMIDRIA product returns, as well as a deterioration of general economic conditions.

We may also experience disruptions to our operations due to COVID-19, such as delays or disruptions with respect to manufacturing of clinical or commercial drug substance or drug product and delays in our clinical trials or in the submission or review of regulatory applications. Such delays or disruptions could negatively affect our commercial operations, clinical programs, and research and development. The health of our employees, contractors and other persons on whom we rely may be adversely affected by COVID-19. Although we are taking precautionary measures intended to help minimize the risk of the virus to our employees, these measures may be ineffective or may otherwise adversely affect our productivity. In addition, the conditions created by the pandemic may intensify other risks inherent in our business. Due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, it is not possible to estimate precisely its impact on our business, operations or financial results; however, the impact could be material.

To the extent COVID-19 adversely affects our business, financial condition, and results of operations and global economic conditions more generally, it may also have the effect of heightening many of the other risk factors described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

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 or 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 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 or 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, collecting data from enrolled patients, adequately monitoring patients before or after treatment, 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, disruptions due to external events, including an outbreak of pandemic or contagious disease such as the COVID-19 coronavirus, which has slowed enrollment in our clinical trials of narsoplimab in patients with IgA nephropathy;

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●

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 by imposing 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 to clinical trial or data collection protocols by institutional review boards or ethics committees.

●

In addition, our clinical trial or development programs have been, and in the future 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, 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 as a result of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and/or increased expenses associated with the services of our contract research organizations (“CROs”), or 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.

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

None.

ITEM 6. EXHIBITS


Exhibit Number		Description
~~Exhibit~~ ~~Number~~ 10.1	~~Description~~	Ninth Amendment to Lease dated January 15, 2020 between Omeros Corporation and BMR-201 Elliott Avenue LLC
~~31.1~~ 10.2*		Consulting Agreement effective February 10, 2020 between Omeros Corporation and Kurt Zumwalt
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		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.1		Cover Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101)

*Indicates management contract or compensatory plan or arrangement.

-32-

~~SIGNATURES~~

Table of Contents

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
	~~OMEROS CORPORATION~~

Dated: May ~~9, 2019~~11, 2020	/s/ Gregory A. Demopulos
	Gregory A. Demopulos, M.D.
	President, Chief Executive Officer and Chairman of the Board of Directors

Dated: May ~~9, 2019~~11, 2020	/s/ Michael A. Jacobsen
	Michael A. Jacobsen
	Vice President, Finance, Chief Accounting Officer and Treasurer

-33-

~~-27-~~


			Page
			~~Page~~
Part I — Financial Information	3 5
Item 1.		Financial Statements (unaudited)	3 5
		Condensed Consolidated Balance Sheets	3 5
		Condensed Consolidated Statements of Operations and Comprehensive Loss	4 6
		Condensed Consolidated Statements of Cash Flows	5 7
		Notes to Condensed Consolidated Financial Statements	6 8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	24 28
Item 4.		Controls and Procedures	24 28
Part II — Other Information			25 29
Item 1.		Legal Proceedings	25 29
Item 1A.		Risk Factors	25 29
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	26 32
Item 6. ~~Exhibits~~		26Exhibits	32
Signatures			27 33



	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	4,054		$	5,861
Short-term investments	43,168			54,637
Receivables, net	24,718			22,818
Inventory	736			88
Prepaid expense and other assets	4,195			6,463
Total current assets	76,871			89,867
Property and equipment, net	4,479			3,845
Right of use assets	17,514			—
Restricted investments	1,154			1,154
Advanced payments, non-current	1,228			1,070
Total assets	$	101,246		$	95,936
Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable	$	7,121		$	6,281
Accrued expenses	34,823			30,186
Current portion of lease liabilities	2,561			889
Total current liabilities	44,505			37,356
Lease liabilities, non-current	26,578			1,578
Unsecured convertible senior notes, net	151,182			148,981
Deferred rent	—			8,177
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 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	552,961			549,479
Accumulated deficit	(674,470		)	(650,125		)
Total shareholders’ deficit	(121,019		)	(100,156		)
Total liabilities and shareholders’ deficit	$	101,246		$	95,936



	Three Months Ended March 31,
	2019			2018
Revenue:
Product sales, net	$	21,779		$	1,588

Costs and expenses:
Cost of product sales	131			203
Research and development	26,255			18,140
Selling, general and administrative	14,632			10,934
Total costs and expenses	41,018			29,277
Loss from operations	(19,239		)	(27,689		)
Interest expense	(5,600		)	(2,825		)
Other income	494			460
Net loss	$	(24,345	)	$	(30,054	)
Comprehensive loss	$	(24,345	)	$	(30,054	)
Basic and diluted net loss per share	$	(0.50	)	$	(0.62	)
Weighted-average shares used to compute basic and diluted net loss per share	49,014,009			48,284,019



	March 31,
	2019	2018
Outstanding options to purchase common stock	11,840,521	9,640,452
Outstanding warrants to purchase common stock	243,115	100,602
Total potentially dilutive shares excluded from loss per share	12,083,636	9,741,054



	March 31, 2019		December 31, 2018
	(In thousands)
Trade receivables, net	$	24,580	$	22,654
Sublease and other receivables	138		164
Total accounts receivables, net	$	24,718	$	22,818



	March 31, 2019
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Money-market funds classified as non-current restricted cash and investments	$	1,154	$	—	$	—	$	1,154
Money-market funds classified as short-term investments	43,168		—		—		43,168
Total	$	44,322	$	—	$	—	$	44,322



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




	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		%



	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



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



	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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company