ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the audited annual consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. For further information regarding forward-looking statements, please refer to the special note regarding forward-looking statements at the beginning of this Annual Report on Form 10-K. Throughout this discussion, unless the context specifies or implies otherwise, the terms “Company,” “we,” “us” and “our” refer to Omeros Corporation and our wholly owned subsidiaries.

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Overview

We are a clinical-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting immunologic diseases, including complement-mediated diseases and cancers related to dysfunction of the immune system, as well as addictive and compulsive disorders.

Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) that, following receipt of a CRL, is pending before the the U.S. Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). We also have multiple Phase 3 and Phase 2 clinical-stage development programs, which are focused on complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”), and COVID-19. We have successfully completed a Phase 1 clinical trial in healthy subjects and are initiating a Phase 1b clinical trial in PNH patients for our MASP-3 inhibitor OMS906 targeting the alternative pathway of complement. We also have successfully completed a Phase 1 study in our phosphodiesterase 7 (“PDE7”) program focused on addiction. In addition, we have a diverse group of preclinical programs, including GPR174, a novel target in immuno-oncology that modulates a new cancer immunity axis that we discovered. We are also advancing other related cancer therapeutics as well as CAR T-cell and adoptive T-cell therapies. Small-molecule and antibody inhibitors of GPR174 are part of our proprietary G protein-coupled receptor (“GPCR”) platform through which we control 54 GPCR drug targets and their corresponding compounds. We also possess a proprietary-asset-enabled antibody-generating technology.

On December 23, 2021, we closed on an Asset Purchase with Rayner Surgical, Inc. (“Rayner”) for the sale of our commercial product OMIDRIA and certain related assets including inventory and prepaid expenses (the “Transaction”). Rayner paid us $126.0 million in cash at closing, and we retained all outstanding accounts receivable as of the closing date. We will receive a royalty on world-wide sales of OMIDRIA and potentially a $200.0 million milestone payment if separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years before January 1, 2025.

As a result of the OMIDRIA divestiture, the results of OMIDRIA operations have been reclassified to net income from discontinued operations, net of tax in our consolidated statements of operations and comprehensive loss and excluded from continuing operations for all periods presented (See Net Income from Discontinued Operations, Net of Tax below for additional information).

As of December 31, 2021, we had $157.3 million in cash and cash equivalents and short-term investments available for general corporate use and $38.2 million in accounts receivable, which we expect to collect in full by March 31, 2022.

Results of Operations

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 drug candidate, contract research organizations (“CROs”), clinical trial sites, collaborators, and licensors and 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. The discontinued operations of OMIDRIA relates to the costs of drug manufacturing stability and quality control testing and costs of employees and consultants. The following table illustrates our expenses associated with these activities:

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Year Ended

Year Ended December 31,

(In thousands)

Continuing research and development expenses:

Direct external expenses:

Clinical research and development:

Discontinued research and development expense 3,839 3,205 3,372

Clinical research and development expenses increased $2.3 million between 2021 and 2020 primarily due to increased narsoplimab drug manufacturing costs partially offset by reduced OMS527 toxicology study costs. The change in clinical research and development costs between 2020 and 2019 is primarily due to the migration of OMS906 from preclinical to clinical research and development beginning in the third quarter of 2020 offset by reduced MASP-2 costs.

Preclinical research and development expenses increased $4.4 million in 2021 compared to 2020, primarily due to drug substance, stability and toxicology work on OMS1029 offset by the migration of OMS906 from preclinical to clinical research and development beginning in the third quarter of 2020. The $3.6 million decrease in preclinical research and development expenses in 2020 compared to 2019 was primarily due to the advancement of OMS906 to clinical research and development in the third quarter of 2020.

The increases in internal, overhead and other expenses in all years presented are primarily due to additional employee-related costs and buildout of expanded laboratory facilities to support our research and development activities.

We expect overall continued research and development costs to increase in 2022 as we continue our ongoing Phase 3 clinical programs for narsoplimab and the manufacturing of narsoplimab drug substance to meet our clinical supply needs as well as our commercial requirements should we receive FDA approval for the use of narsoplimab for the treatment of HSCT-TMA. Our accounting policy is to expense all manufacturing costs related to drug candidates until regulatory approval is reasonably assured in either the U.S. or Europe.

At this time, we are unable to estimate with certainty the longer-term costs we will incur in the continued development of our drug candidates due to the inherently unpredictable nature of our preclinical and clinical development activities as well as the potential impact 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 drug candidate as well as ongoing assessments of each program’s commercial potential. In addition, we cannot forecast with precision which drug 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 drug 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.

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses are comprised primarily of salaries, benefits and stock-compensation costs for sales, marketing and other personnel who are not directly engaged in research and development. Costs also include marketing and selling expenses, professional and legal services, general corporate costs and an allocation of our occupancy costs.

Year Ended December 31,

(In thousands)

Continuing selling, general and administrative expense:

The increase in continuing selling, general and administrative expenses, excluding stock-based compensation, during both years ended December 31, 2021 and 2020 was primarily due to increased pre-commercialization activities for narsoplimab for the treatment of HSCT-TMA.

Our continuing selling, general and administrative expenses for 2022 are highly dependent on the approval of narsoplimab as we have not yet hired the narsoplimab field sales force or initiated various commercial launch activities. If narsoplimab is approved in 2022, our continuing selling, general and administrative expenses will increase as we hire the field sales team and initiate commercial launch activities. If narsoplimab is not approved, our continuing selling, general and administrative expenses are expected to be less than in 2021.

Interest Expense

Year Ended December 31,

(In thousands)

Interest expense is primarily comprised of contractual interest and amortization of debt issuance and debt discount related to our 6.25% Convertible Senior Notes (the “2023 Notes”) and 5.25% Convertible Senior Notes (the “2026 Notes”) as well as interest on our finance leases. Interest expense decreased $7.1 million compared to the prior year due to the January 1, 2021 adoption of ASU 2020-06, which eliminated the amortization of the non-cash debt discount on the 2023 and 2026 Notes previously allocated to equity. This decrease was partially offset by the increase in interest related to our 2026 Notes, which were issued in August and September 2020.For more information regarding our debt and our unsecured convertible notes (see Part II, Item 8, “Note 9—Unsecured Convertible Senior Notes”).

Loss on Early Extinguishment of Debt

Year Ended December 31,

(In thousands)

Loss on early extinguishment of debt $ — $ 13,374 $ —

In August 2020, we repurchased $115.0 million of the outstanding 2023 Notes. We recorded a $13.4 million loss on early extinguishment of debt related to the unamortized discount and issuance costs related to the repurchase.

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Other Income

Year Ended December 31,

(In thousands)

Other income principally includes sublease rental income and interest earned on our cash and investments. The variations between years is primarily due to $0.8 million of expenses incurred in 2020 in connection with terminating the portion of the capped call related to the 2023 Notes that we repurchased.

Income Tax Benefit

Year Ended December 31,

(In thousands)

The income tax benefit in 2020 relates to the issuance of the 2026 Notes respectively (see Part II, Item 8, “Note 14—Income Taxes”).

In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Income Taxes (Topic 740), which is intended to simplify various aspects of the income tax accounting guidance. ASU 2019-12 eliminates the exception to the incremental approach of intra-period tax allocation when there is a loss from continuing operations and income or gain from other items. As the Company prospectively adopted ASU 2019-12 January 1, 2021, we did not apply any intraperiod allocation rules to 2021. However, we reclassified the tax benefit of income from discontinued operations in prior periods to offset losses from continuing operations.

During 2020, we recorded an income tax benefit of $23.3 million from continuing operations comprising $12.0 million related to the issuance of our 2026 and 2023 Notes, and an additional $11.2 million income tax benefit related to the sale of OMIDRIA assets to Rayner into income from continuing operations. During 2019, we recorded $19.7 million of income tax benefit into continuing operations related to OMIDRIA assets sold to Rayner.

Net Income from Discontinued Operations, Net of Tax

On December 23, 2021, we sold our commercial drug, OMIDRIA, to Rayner. As a result of the OMIDRIA divestiture, the results of OMIDRIA operations have been reclassified to discontinued operations in our consolidated statements of operations and comprehensive loss and excluded from continuing operations for all periods presented. Net income from discontinued operations, net of tax is as follows:

Year Ended December 31,

(In thousands)

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Net income from OMIDRIA operations and the gain recognized on disposition of the asset is shown below:

Year Ended December 31,

(In thousands)

Royalty income 1,035 — —

Costs and expenses:

Gain on sale of OMIDRIA, net 305,648 — —

Product Sales, Net and Royalty Income

The fluctuation in 2020 product sales, net, reclassed to discontinued operations, was due to COVID-19-related reductions in the number of elective cataract procedures from mid-March 2020 through late June 2020. Additionally OMIDRIA pass-through reimbursement under Medicare Part B expired on October 1, 2020 and OMIDRIA revenues were significantly reduced. In December 2020, CMS confirmed that OMIDRIA qualifies for separate payment when used in the ASC setting, and sales normalized during the first half of 2021.

After the sale of OMIDRIA to Rayner, we receive royalty payments of 50% of U.S. domestic net sales. We will continue to earn royalties at this rate until the earlier of January 1, 2025 or when separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years. Should separate payment be achieved during this time, the Company would receive a $200.0-million milestone payment from Rayner. Upon the earlier of qualifying for the milestone payment or January 1, 2025, the royalty rate will be reduced to 30% (the “U.S. base royalty rate”) until the expiration or termination of the last issued and unexpired U.S. patent. The U.S. base royalty rate is reduced to 10% upon the occurrence of certain events such as OMIDRIA no longer being eligible for separate payment. We will also receive a royalty of 15% on OMIDRIA net sales outside the U.S. on a country-by-country basis until the expiration or termination of the last issued and unexpired OMIDRIA patent in such country.

OMIDRIA sales have historically been highly dependent on separate payment under Medicare Part B. Given that OMIDRIA reimbursement might be dependent on CMS’ annual renewals and policy, we would likely experience

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significant fluctuations in period-over-period OMIDRIA royalty earnings should CMS change its non-opioid separate payment policy, which likely would effect CMS’ reimbursement of OMIDRIA.

Deductions to OMIDRIA sales consist of chargebacks, rebates, distribution fees and product return allowances (seePart II, Item 8, “Note 2—Significant Accounting Policies”). The overall percentage deductions to OMIDRIA sales were as follows:

Year Ended December 31,

Deductions percentage to OMIDRIA sales 29.9 % 31.2 % 27.7 %

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

(In thousands)

OMIDRIA contract royalty asset 184,570

Gain on sale of OMIDRIA, gross 310,563

Transaction and closing costs (1,972)

Restricted Stock Units ("RSUs") granted to transferred employees (1,419)

Prepaid assets and inventory at cost (1,524)

Gain on sale of OMIDRIA, net $ 305,648

OMIDRIA Royalties and OMIDRIA Contract Royalty Assets

Upon the closing of the Transaction, we have rights to receive from Rayner future royalties on OMIDRIA net sales at royalty rates that vary based on geography and certain regulatory contingencies. Therefore, future OMIDRIA royalties are treated as variable consideration. The sale of OMIDRIA qualifies as an asset sale. To measure the OMIDRIA contract royalty asset, we used the expected value approach which is the sum of the discounted probability-weighted royalty payments, net of tax, we would receive using a range of potential outcomes, to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur. The contract royalty asset excludes the achievement of the $200.0-million milestone payment and any foreign royalties to the extent it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Royalties earned will be recorded as a reduction to the OMIDRIA contract royalty asset. The amount recorded in discontinued operations in future periods will reflect interest earned on the outstanding OMIDRIA contract royalty asset and any amounts received different from the expected royalties recorded at closing.The OMIDRIA contract royalty asset will also be re-measured periodically using the expected value approach based on actual results and future expectations Any required adjustment to the OMIDRIA contract royalty asset will be recorded into discontinued operations.

On December 22, 2021, the Company granted and expensed RSUs to employees who accepted offers to work for Rayner as a retention incentive to help drive sales of OMIDRIA. The RSUs vest over a two-year period contingent on continued employment at Rayner.

Financial Condition - Liquidity and Capital Resources

As of December 31, 2021, we had $157.3 million in cash, cash equivalents and short-term investments available for general corporate use held primarily in money-market accounts, as compared to $135.0 million at December 31, 2020. As of December 31, 2021, we also had accounts receivable of $38.2 million. We have historically generated net losses and incurred negative cash flows. With the sale of OMIDRIA to Rayner, we had net income of $194.2 million and negative cash flows from operations of $109.7 million as compared to negative cash flows of $100.1 million in the prior year.

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We plan to continue to fund our operations with our cash and investments, our outstanding accounts receivable, OMIDRIA royalties and potentially the $200.0 million milestone related to achieving long-term OMIDRIA separate payment. If FDA approval is granted for narsoplimab for HSCT-TMA within the next twelve months, sales of narsoplimab will also provide funds for our operations. In addition, we have a sales agreement to sell shares of our common stock, from time to time, in an “at the market” equity offering facility through which we may offer and sell shares of our common stock having an aggregate amount of up to $150.0 million. Should it be determined to be strategically advantageous, we could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology. Should it be necessary to manage our operating expenses, we would reduce our projected cash requirements by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities. We have $95.0 million of 2023 Notes due in November 2023. We plan to fund the repayment of the 2023 Notes through cash from operations, including narsoplimab HSCT-TMA revenues should approval be granted by FDA, the $200.0 million milestone related to OMIDRIA, strategic transactions, sale of stock or through issuance of additional debt.

Cash Flow Data

Year Ended December 31,

(In thousands)

Selected cash flow data

Cash provided by (used in):

Operating Activities. Net cash used in operating activities increased for the year ended December 31, 2021 by $9.6 million compared to the same period in 2020. The change in net income adjusted for non-cash items increased by $12.1 million. In addition, we had a $65.7 million increase in the change in operating receivables due to timing of OMIDRIA Medicare Part B reimbursement and a $34.4 million decrease in the change in accounts payable.

Net cash used in operating activities increased for the year ended December 31, 2020 by $40.0 million compared to the same period in 2019. The difference largely resulted from the $53.6 million increase in our net loss from 2019, a $33.0 million increase in cash used in accounts payable and accrued expense, and a $3.6 million increase in cash used for prepaid and other assets. These increases were partially offset by a $43.7 million increase in cash provided from collections of accounts receivable and an increase in non-cash charges of $5.6 million.

Investing Activities.Net cash provided by investing activities increased $260.7 million during 2021 compared to the same period in 2020. This was driven by the $126.0 million payment made as part of the OMIDRIA asset sale and an increase of $134.7 million in net proceeds from the purchase and sale of investments.

Net cash used in investing activities increased $63.6 million during 2020 compared to the same period in 2019, driven by an increase in purchases of investments of $133.2 million offset by proceeds from sale and maturities of investments of $66.4 million.

Financing Activities. Net cash provided by financing activities during 2021 decreased $168.2 million from the prior year. The decrease was due to receiving cash proceeds of $76.9 million, net, in the prior year, from the issuance of our 2026 Notes, which includes the payments for partial repurchase of our 2023 Notes, payments for debt issuance costs, proceeds from termination of our 2023 capped call, and purchases of capped calls related to our 2026 Notes. In addition, we received net proceeds of $93.7 million from our August 2020 public offering of our common stock.

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Convertible Notes

For more information regarding the 2023 and 2026 Notes see (Part II, Item 8, “Note 8—Unsecured Convertible Senior Notes”).

Line of Credit

We have a Line of Credit Agreement that is secured by all our assets excluding intellectual property and development program inventories and matures on August 2, 2022. The Line of Credit is based upon maintaining a certain amount of accounts receivables including royalty receivables from Rayner. As of December 31, 2021, we had no outstanding borrowings under the Line of Credit Agreement and we were in compliance with all covenants. For more information regarding the Line of Credit Agreement (see Part II, Item 8, “Note 8—Line of Credit”).

Contractual Obligations and Commitments

Operating Leases

We lease our office and laboratory space in The Omeros Building under a lease agreement with BMR - 201 Elliott Avenue LLC. The initial term of the lease ends in November 2027 and we have two options to extend the lease term, each by five years. We lease office and laboratory equipment under various operating and finance lease agreements with initial terms of five years or less. As of December 31, 2021, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $42.9 million.

Convertible Notes

Refer to “Financial Condition—Liquidity and Capital Resources—Convertible Notes” above.

Goods & Services

We have certain non-cancelable obligations under other agreements for the acquisitions of goods and services associated with the manufacturing of our drug candidates, which contain firm commitments. As of December 31, 2021, our aggregate firm commitments are $32.0 million.

We may 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 table above. For information regarding agreements that include these royalty and milestone payment obligations, see Part II, Item 8, “Note 11—Commitments and Contingencies” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our consolidated financial statements, in conformity with U.S. generally accepted accounting principles (“GAAP”), requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances; however, actual results could differ from those estimates. An accounting policy is considered critical if it is important to a company’s financial condition and results of operations and if it requires the exercise of significant judgment and the use of estimates on the part of management in its application. Although we believe that our judgments and estimates are appropriate, actual results may differ materially from our estimates. For a summary of our critical accounting policies, (see Part II, Item 8, “Note 2—Significant Accounting Policies” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

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We believe the following to be our critical accounting policies because they are both important to the portrayal of our financial condition and results of operations and they require critical judgment by management and estimates about matters that are uncertain:

● revenue recognition;

● OMIDRIA royalties and contract asset accounting;

● research and development expenses related to clinical trials;

● stock-based compensation, primarily related to our fair value assumptions.

If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Revenue Recognition

Product Sales, Net: We record revenue from product sales when the product is delivered to our wholesalers which is generally when we satisfy all performance obligations. Product sales arerecorded 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 actualamounts incurred are offset against the applicable accruals or allowances. We reflect each of these accruals orallowances as either a reduction in the related accounts receivable or as an accrued liability depending on how theamount is expected to be settled.

Chargebacks and Rebates: Provisions for chargebacks are determined utilizing historical and projected payer mix and information regarding sell-through and inventory on-hand received directly from wholesalers. Chargebacks are generally settled within four weeks of recording product sales revenue.

We provide reimbursement support services and financial assistance in the form of a rebate to patients whose commercial insurance is inadequate to cover the full cost of our drug product. We apply an experience ratio based on historical and projected patient claims. This experience ratio is applied to product sales to determine the patient rebate accrual and is reviewed and updated periodically to reflect actual results.

Distribution Fees and Product Return Allowances: We pay our wholesalers a distribution fee for services that they perform for us based on the wholesaler average cost value of their purchases. We record a provision against product sales for these charges at the time of sale to the wholesaler.

We allow for the return of product up to 12 months past its expiration date or for product that is damaged. In estimating product returns, we take into consideration our return experience to date, the remaining shelf-life of product we have previously sold, inventory in the wholesale channel and our expectation that product is typically not held by the health care providers based on the frequency of their reorders.

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OMIDRIA Royalties and OMIDRIA Contract Royalty Asset

Upon the closing of the Transaction, we have rights to receive future royalties from Rayner on OMIDRIA net sales at royalty rates that vary based on geography and certain regulatory contingencies. Therefore, future OMIDRIA royalties are treated as variable consideration. To measure the OMIDRIA contract royalty asset, we used the expected value approach which is the the discounted sum of probability-weighted royalty payments, net of tax, we would receive using a range of potential outcomes, to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Our calculations take the net present value of the sum to arrive at the OMIDRIA contract royalty asset stated on the balance sheet. The contract royalty asset excludes the achievement of the $200.0- million milestone payment and any foreign royalties to the extent it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Royalties earned will be recorded as a reduction to the OMIDRIA contract royalty asset. The amount recorded in discontinued operations in future periods will reflect interest earned on the outstanding OMIDRIA contract royalty asset and any amounts received different from the expected royalties recorded at closing. The OMIDRIA contract royalty asset is subject to changes in net sales of OMIDRIA. A 10% change in net sales results in an $18.4 million change in value of the OMIDRIA contract royalty asset, resulting in a potential contract royalty asset valued within the range of $166.7 million to $203.5 million, all else being equal. Changes in net sales could occur due to various risks such as competitors entering the market, technology change as to how cataracts are treated and loss of separate payment status. In determing the value of the OMIDRIA contract royalty asset, we have considered all these factors. The OMIDRIA contract royalty asset will be re-measured periodically using the expected value approach based on actual results and future expectations. Any required adjustment to the OMIDRIA contract royalty asset will be recorded into discontinued operations.

We receive monthly royalty payments based on Rayner’s OMIDRIA product sales in accordance with the Asset Purchase Agreement. Upon the closing of the Transaction, we determined the expected minimum net present value of future OMIDRIA royalty payments and recognized the amount as a gain on the sale of OMIDRIA in discontinued operations on our income statement and as OMIDRIA contract royalty asset on our balance sheet. To determine the OMIDRIA contract royalty asset, we used the expected value approach which is based on the sum of probability-weighted payments we would receive using a range of potential outcomes using a double digit discount rate and the statutory federal income tax rate. The contract royalty asset excludes any revenue which potentially may be reversed in the event of an over estimation. Therefore, we did not include any expectation of receiving the $200.0-million milestone payment or any foreign royalties as we could not judge the probability of those events with certainty.

Royalties earned will be recorded as a reduction to the OMIDRIA contract royalty asset. The amount recorded through earnings in discontinued operations will reflect the time value of money on the outstanding OMIDRIA contract royalty asset. The OMIDRIA contract royalty asset will be evaluated periodically and adjusted using the expected value approach based on actual results and future expectations. Any required adjustments will be recorded into discontinued operations.

Research and Development Expenses

Research and development costs are comprised primarily of:

● contracted research and manufacturing costs;

● clinical study costs;

● costs of personnel, including salaries, benefits and stock compensation;

● consulting arrangements;

● depreciation and an allocation of our occupancy costs; and

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Contracted research and manufacturing costs are primarily incurred in the development and production of our drug substance and drug candidates. Prior to approval, our estimates are based on the timing of services provided. We record accrued expenses equal to our estimated expense in excess of amount invoiced by the suppliers.

Clinical trial expenses are estimated on a cost per patient that varies depending on the clinical trial site. As actual costs become known to us, we adjust our estimates; these changes in estimates may result in understated or overstated expenses at any given point in time.

Right-of-Use Assets and Related Lease Liabilities

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 derived our incremental borrowing rate by assessing rates in recent market transactions, as adjusted for security interests and our credit quality. A change in the calculated incremental borrowing rate of 100 basis points would not be material to our consolidated financial statements.

Convertible Debt Issuances

On January 1, 2021, we adopted Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion Options (Subtopic 470.20 and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) on a modified retrospective basis. ASU 2020-06 removes the separate liability and equity accounting for our convertible senior notes. As of January 1, 2021, we account for our convertible senior notes wholly as debt. Prior to January 1, 2021, we accounted for convertible debt that may be settled wholly or partially in cash upon conversion as having both a liability component (debt) and an equity component (conversion option). The cash conversion guidance applies as the embedded conversion features meet the requirements for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity in the balance sheet. Principal cash proceeds from the instrument are allocated first to the liability component based on the fair value of non-convertible debt using the income and market-based approaches to determine an effective interest rate for present valuing the cash proceeds. For the income-based approach, we use a convertible bond pricing model that includes several assumptions such as volatility and a risk-free rate. For the market-based approach, we observe the price of derivative price instruments purchased in conjunction with our convertible senior note issuances or evaluate issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. Issuance costs from the instrument are then allocated to the liability and equity components in the same proportion as the proceeds. The equity component of the cash principal proceeds and the liability component of the issuance costs represent a debt discount. which we amortized in prior years as non-cash interest expense over the term of the notes method. On

Transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor are evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms. The 2023 Notes repurchase and issuance of the 2026 Notes) were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange. Therefore, the repurchase of the 2023 Notes was accounted for as a debt extinguishment.

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments made to employees, directors and non-employees based on estimated fair values. The fair value of our stock options is calculated using the Black-Scholes option valuation model, which requires assumptions, including volatility, forfeiture rates and expected option life. We estimate forfeitures for expense recognition based on our historical experience. Groups of employees that have similar historical forfeiture behavior are considered separately. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense for new awards may differ materially from that recorded for existing awards and stock-based compensation for non-employees will vary as the awards are re-measured over the vesting term.

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Recent Accounting Pronouncements

Please refer to Part II, Item 8, “Note 2--Significant Accounting Policies” to our Consolidated Financial Statements in this Annual Report in Form 10-K for information regarding recent accounting pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is primarily confined to our investment securities and debt. The primary objective of our investment activities is to preserve our capital to fund operations, and we do not enter into financial instruments for trading or speculative purposes. 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 December 31, 2021, we had cash, cash equivalents and short-term investments of $157.3 million. In accordance with our investment policy, we invest funds in highly liquid, investment-grade securities. The 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 effect 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 60

Consolidated Balance Sheets 62

Consolidated Statements of Operations and Comprehensive Loss 63

Consolidated Statement of Shareholders’ Equity (Deficit) 64

Consolidated Statements of Cash Flows 65

Notes to Consolidated Financial Statements 66

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

Omeros Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Omeros Corporation (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2022 expressed an unqualified opinion thereon.

Adoption of ASU No. 2020-06

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for convertible instruments in 2021 due to the adoption of ASU No. 2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Revenue Deductions

OMIDRIA Contract Royalty Asset

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1998.

Seattle, Washington

March 1, 2022

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OMEROS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31, December 31,

Assets

Current assets:

OMIDRIA contract royalty asset, short-term 44,319 —

Prepaid expense and other assets 8,149 10,455

Current assets from discontinued operations — 2,036

OMIDRIA contract royalty asset 140,251 —

Property and equipment, net 1,731 2,551

Advanced payments, non-current 67 625

Liabilities and shareholders’ equity (deficit)

Current liabilities:

Current portion of lease liabilities 5,255 3,782

Other accrued liabilities - noncurrent 1,115 —

Commitments and contingencies (Note 11)

Shareholders’ equity (deficit):

Total shareholders’ equity (deficit) 23,780 (120,752)

Total liabilities and shareholders’ equity (deficit) $ 419,268 $ 181,042

See accompanying Notes to Consolidated Financial Statements

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OMEROS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

Year Ended December 31,

Product sales, net $ — $ — $ —

Costs and expenses:

Cost of product sales — — —

Loss on early extinguishment of debt — (13,374) —

Basic and diluted net income (loss) per share

Net loss from continuing operations $ (3.07) $ (3.02) $ (2.98)

Net income from discontinued operations 6.19 0.61 1.27

Net income (loss) $ 3.12 $ (2.41) $ (1.71)

See accompanying Notes to Consolidated Financial Statements

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OMEROS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

Additional Total

Common Stock Paid-in Accumulated Shareholders’

Shares Amount Capital Deficit Equity/(Deficit)

Stock-based compensation — — 13,785 — 13,785

Stock-based compensation — — 14,770 — 14,770

Purchase of 2026 Capped Calls — — (23,223) — (23,223)

At the market offering fees — — (241) — (241)

Stock-based compensation — — 17,539 — 17,539

See accompanying Notes to Consolidated Financial Statements

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OMEROS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Operating activities:

Gain on the sale of OMIDRIA, gross (310,563) — —

Loss on early extinguishment of debt — 13,374 —

Deferred income tax — (12,011) —

Fair value settlement upon termination of cap call contract — 838 —

Changes in operating assets and liabilities:

Prepaid expenses and other assets 4,900 (4,024) (1,310)

Other liabilities non-current 668 — —

Investing activities:

Cash proceeds for the sale of OMIDRIA 125,993 — —

Purchases of property and equipment (277) (283) (334)

Financing activities:

Proceeds from issuance of convertible senior notes — 225,030 —

Payments for debt issuance costs — (6,785) —

Purchases of capped calls related to convertible senior notes — (23,223) —

Payments for repurchases of convertible senior notes — (125,638) —

Proceeds from termination of capped call contracts — 7,549 —

Proceeds from issuance of common stock, net — 93,675 54,238

Release in restricted investments — 99 —

Proceeds upon exercise of stock options and warrants 8,383 5,022 7,598

At the market offering costs (241) — —

Payments on finance lease obligations (1,823) (1,195) (1,139)

Net increase (decrease) in cash and cash equivalents 90,307 7,417 (2,777)

Cash and cash equivalents at beginning of period 10,501 3,084 5,861

Supplemental cash flow information

Property acquired under finance lease $ 289 $ 216 $ 1,440

See accompanying Notes to Consolidated Financial Statements

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OMEROS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Organization and Basis of Presentation

General

Omeros Corporation (“Omeros,” the “Company” or “we”) is a clinical-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting immunologic diseases, including complement-mediated diseases and cancers related to dysfunction of the immune system, as well as addictive and compulsive disorders. Our first drug product, OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1% / 0.3%, is marketed in the United States (the “U.S.”) for use during cataract surgery or intraocular lens replacement. We sold OMIDRIA and related business assets on December 23, 2021. See “Sale of OMIDRIA Assets” below for additional information.

Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) pending before the U.S. Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). On October 18, 2021, we announced the receipt of a Complete Response Letter (“CRL”) from FDA regarding the BLA. In the CRL, FDA expressed difficulty in estimating the treatment effect of narsoplimab in HSCT-TMA and asserted that additional information will be needed to support regulatory approval. In February 2022, we had a Type A meeting with FDA to discuss the CRL, including each of the review issues that FDA identified as presenting difficulties interpreting the treatment response in the pivotal trial. We are currently awaiting FDA’s response to our rebuttals to each of those review issues. We continue to believe that our BLA, as submitted, merits approval and that the data meet or exceed the threshold for substantial evidence of effectiveness.

We also have multiple late-stage clinical development programs in our pipeline, which are focused on: complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19.

Sale of OMIDRIA Assets

On December 23, 2021, we closed on an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rayner Surgical Inc. (“Rayner”) for the sale of our commercial product OMIDRIA and certain related assets including inventory and prepaid expenses (the “Transaction”). Rayner paid us $126.0 million in cash at closing, and we retained all outstanding accounts receivable, accounts payable and accrued expenses as of the closing date. We will receive a royalty on worldwide sales of OMIDRIA and potentially a $200.0 million milestone payment if separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years before January 1, 2025.

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

Basis of Presentation

Our consolidated financial statements include the financial position and results of operations of Omeros and our wholly owned subsidiaries. All inter-company transactions have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain prior year amounts in the balance sheet, statement of cash flows and the footnotes have been reclassified in the consolidated financial statements to conform to the current year presentation.

Risks and Uncertainties

As of December 31, 2021, we had cash, cash equivalents and short-term investments of $157.3 million and outstanding accounts receivable of $38.2 million. Our loss from continuing operations for the year ended December 31,

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2021 was $191.5 million. This loss from operations does not include the $80.1 million in earnings from OMIDRIA included in discontinued operations which occurred prior to the sale, a large portion of which we expect to retain through royalties and expense reductions on a go forward basis.

We plan to continue to fund our operations for the next twelve months with our existing cash and investments, our current accounts receivable, and OMIDRIA royalties. There is also the potential for us to receive a $200.0 million milestone related to achievement of long-term OMIDRIA separate payment. If FDA approval is granted for narsoplimab for HSCT-TMA within the next twelve months, sales of narsoplimab will also provide funds for our operations. We have a sales agreement to sell shares of our common stock, from time to time, in an “at the market” equity offering facility through which we may offer and sell shares of our common stock equaling an aggregate amount up to $150.0 million.Should it be determined to be strategically advantageous, we could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology.

Management believes the assets on hand along with expected royalties received are adequate to finance our operations at least through March 2, 2023. Accordingly, the accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The outbreak of the novel strain of coronavirus that causes COVID-19 and the responses to the global pandemic by various governmental authorities, the medical community and others has had a significant impact on our business. Due to the unknown magnitude, duration, and outcome of the COVID-19 pandemic, it is not possible to estimate precisely the continued impact on our business, operations or financial results; however, the impact has been and could continue to be substantial.

Segments

We operate in one segment. Management uses cash flow as the primary measure to manage our business and does not segment our business for internal reporting or decision-making.

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, OMIDRIA contract royalty asset valuation, stock-based compensation expense, and accruals for clinical trials and manufacturing of drug product. We base our estimates on historical experience and on various other factors, including the impact of the COVID-19 pandemic, that we believe are reasonable under the circumstances; however, actual results could differ from these estimates.

Note 2—Significant Accounting Policies

Discontinued Operations

We review the presentation of planned or completed business dispositions in the consolidated financial statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business and, if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results.

Planned or completed business dispositions are presented as discontinued operations when all the criteria described above are met. For those divestitures that qualify as discontinued operations, all comparative periods presented are reclassified in the consolidated balance sheets. Additionally, the results of operations of a discontinued operation are reclassified to income from discontinued operations, net of tax, for all periods presented in the consolidated statements

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of operations and comprehensive loss. Results of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations. The OMIDRIA asset sale to Rayner qualifies as a discontinued operation and has been presented as such for all reporting periods presented. The Company included information regarding cash flows from discontinued operations (see “Note 3 – Discontinued Operations”).

OMIDRIA Royalties and OMIDRIA Contract Royalty Assets

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

Cash and cash equivalents include highly liquid investments with a maturity of three months or less on the date of purchase. Short-term investment securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses, if any, are reported as a separate component of shareholders’ equity. Amortization, accretion, interest, and dividends, realized gains and losses and declines in value judged to be other-than-temporary are included in other income. The cost of securities sold is based on the specific-identification method. Investments in securities with maturities of less than one year, or those for which management intends to use the investments to fund current operations, are included in current assets. We evaluate whether an investment is other-than-temporarily impaired based on the specific facts and circumstances. Factors that are considered in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment. Restricted investments held in money-market funds include security deposits held by our landlord.

As of December 31, 2021 and 2020, all investments are classified as short-term and available-for-sale. Investment income, which is included as a component of other income, consists primarily of interest earned.

Inventory

Inventory is stated at the lower of cost or market determined on a specific identification basis in a manner that approximates the first-in, first-out (“FIFO’) method. Costs include amounts related to third-party manufacturing, transportation, and internal labor and overhead. Capitalization of costs as inventory begins when regulatory approval of the drug candidate is reasonably assured in the U.S. or the European Union (‘EU”). We expense inventory costs related to drug candidates as research and development expenses prior to receiving regulatory approval in the respective territory. Inventory is reduced to net realizable value for excess and obsolete inventories based on forecasted demand. Inventory with an alternative future use is capitalized.

Receivables, Net

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

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receivables. Remaining receivables generally consist of amounts from subleases for space in our facilities. Considering the nature and historic collectability of our receivables, we concluded an allowance for doubtful accounts is not necessary as of December 31, 2021 and 2020.

Property and Equipment, Net

Property and equipment are stated at cost, and depreciation is calculated using the straight-line method over the estimated useful life of the assets, which is generally three to 10 years. Equipment acquired through finance leases is recorded as property and equipment and is amortized over the shorter of the useful lives of the related assets or the lease term. Expenditures for repairs and maintenance are expensed as incurred.

Right-of-Use Assets and Related Lease Liabilities

We record operating leases as right-of-use assets and recognize the related lease liabilities equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available. We recognize variable lease payments, when incurred. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.

We record finance leases as a component of property and equipment and amortize these assets within operating expenses on a straight-line basis to their residual values over the shorter of the term of the underlying lease or the estimated useful life of the equipment. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.

We account for leases with initial terms of 12 months or less as operating expenses on a straight-line basis over the lease term.

Unsecured Convertible Senior Notes

Transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor are evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms. The 6.25% Convertible Senior Notes (the “2023 Notes”) repurchase and issuance of the 5.25% Convertible Senior Notes (“2026 Notes”) were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange. Therefore, the repurchase of the 2023 Notes was accounted for as a debt extinguishment. (See “Note 9 – Unsecured Convertible Senior Debt”).

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, primarily property and equipment, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of these assets is measured by comparing the carrying value to future undiscounted cash flows that the asset is expected to generate. If the asset is impaired, the amount of any impairment will be reflected in the results of operations in the period of impairment. We have not recognized any impairment losses for the years ended December 31, 2021, 2020 and 2019.

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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 and title for the product is transferred. Product sales are recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts. Accruals or allowances are established for these deductions in the same period when revenue is recognized, and actual amounts incurred are offset against the applicable accruals or allowances. We reflect each of these accruals or allowances as either a reduction in the related accounts receivable or as an accrued liability depending on how the amount is expected to be settled.

Chargebacks and Rebates

Provisions for chargebacks are determined utilizing historical and projected payer mix and information regarding sell-through and inventory on-hand received directly from wholesalers. Chargebacks are generally settled within four weeks of recording product sales revenue.

We provide reimbursement support services and financial assistance in the form of a rebate to patients whose commercial insurance is inadequate to cover the full cost of our drug product. We apply an experience ratio based on historical and projected patient claims. This experience ratio is applied to product sales to determine the patient rebate accrual and is being reviewed and updated periodically to reflect actual results.

Distribution Fees and Product Return Allowances

We pay our wholesalers a distribution fee for services that they perform for us based on the wholesaler average cost value of their purchases. We record a provision against product sales for these charges at the time of sale to the wholesaler.

Research and Development

Research and development expenses are comprised primarily of contracted research and manufacturing costs prior to approval; costs for personnel, including salaries, benefits and stock compensation; clinical study costs; contracted research; manufacturing costs prior to approval; consulting services; depreciation; materials and supplies; milestones; an allocation of our occupancy costs; and other expenses incurred to sustain our overall research and development programs. 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. All other research and development costs are expensed as incurred.

Selling, General and Administrative

Selling, general and administrative expenses are comprised primarily of salaries, benefits, and stock-compensation costs for sales, marketing, and other personnel not directly engaged in research and development. Additionally, selling, general and administrative expenses include marketing and selling expenses, professional and legal services; patent

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costs; depreciation, an allocation of our occupancy costs; and other general corporate expenses. Advertising costs, which we consider to be media and marketing materials, are expensed as incurred and were $7.8 million, $5.6 million and $8.0 million during the years ended December 31, 2021, 2020 and 2019, respectively.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained upon an examination. A valuation allowance is established when it is more likely than not that the deferred tax assets will not be realized.

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments based on estimated fair values. The fair value of our stock options is calculated using the Black-Scholes option-pricing model which requires judgmental assumptions around volatility, forfeiture rates and expected option term. Compensation expense is recognized over the optionees’ requisite service periods, which is generally the vesting period, using the straight-line method. Forfeiture expense is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is comprised of net loss and certain changes in equity that are excluded from net loss. There was no difference between comprehensive loss and net loss for the years ended December 31, 2021, 2020 or 2019.

Financial Instruments and Concentrations of Credit Risk

Cash and cash equivalents, receivables, accounts payable and accrued liabilities, which are recorded at invoiced amount or cost, approximate fair value based on the short-term nature of these financial instruments. The fair value of short-term investments is based on quoted market prices. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and receivables. Cash and cash equivalents are held by financial institutions and are federally insured up to certain limits. At times, our cash and cash equivalents balance held at a financial institution may exceeds the federally insured limits. To limit the credit risk, we invest our excess cash in high-quality securities such as money market mutual funds, certificates of deposit and commercial paper.

Major Customers

Prior to the sale of OMIDRIA to Rayner, we sold OMIDRIA through a limited number of wholesalers. Each of these wholesalers, together with entities under their common control, accounted for greater than 10% of our total

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

Percentage Percentage Percentage Percentage Percentage Percentage

of Total of Accounts of Total of Accounts of Total of Accounts

Revenue Receivable Revenue Receivable Revenue Receivable

Note 3—Discontinued Operations

On December 23, 2021, we closed an Asset and Purchase Agreement for the sale of OMIDRIA and certain related assets including inventory and prepaid expenses. We retained the outstanding accounts receivable and all outstanding liabilities related to OMIDRIA as of the closing date.

Upon closing, we received an up-front cash payment of $126.0 million. We will also receive a 50% royalty on OMIDRIA net sales in the U.S. between December 23, 2021 and the earlier of January 1, 2025 or the payment of the $200.0 million milestone described below. After such date, we will receive a 30% royalty on OMIDRIA net sales in the U.S. (the “U.S. base royalty rate”) until the expiration or termination of the last issued and unexpired U.S. patent. The U.S. base royalty rate is reduced to 10% upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment. We will also receive a royalty of 15% on OMIDRIA net sales outside the U.S. on a country-by-country basis between the closing date and the expiration or termination of the last issued and unexpired OMIDRIA patent in such country. We will receive a $200.0 million milestone payment if, prior to January 1, 2025, separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years.

The sale of OMIDRIA was recorded as an asset sale and all comparative periods presented are required to be reclassified in the consolidated balance sheets. Additionally, the results of operations for OMIDRIA are reclassified to income from discontinued operations for all periods presented in the consolidated statements of operations and comprehensive loss.

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

Year Ended December 31,

(In thousands)

Royalty income 1,035 — —

Costs and expenses:

Gain on sale of OMIDRIA, net 305,648 — —

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

(In thousands)

OMIDRIA contract royalty asset 184,570

Gain on sale of OMIDRIA, gross 310,563

Transaction and closing costs (1,972)

Restricted Stock Units ("RSUs") granted to transferred employees (1,419)

Prepaid assets and inventory at cost (1,524)

Gain on sale of OMIDRIA, net $ 305,648

Cash flow from discontinued operations is as follows:

Year Ended December 31,

(In thousands)

Total investing cash flows from discontinued operations $ 125,993 $ — $ —

Note 4—Net Loss Per Share

Our potentially dilutive securities include potential common shares related to our stock options, warrants, restricted stock units and unsecured convertible senior notes. Diluted earnings per share (“Diluted EPS”) considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted EPS excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period.

Potentially dilutive securities excluded from Diluted EPS are as follows:

Year Ended December 31,

Outstanding restricted stock units 2,642 — —

Outstanding warrants to purchase common stock — 10,792 16,153

Note 5—Accounts Receivable, Net

Accounts receivable, net consists of the following:

December 31, December 31,

(In thousands)

Sublease and other receivables 1,650 70

Total accounts receivables, net $ 38,155 $ 3,841

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

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Note 6—Fair-Value Measurements

As of December 31, 2021 and 2020, all investments were classified as short-term and available-for-sale. Investment income, which was included as a component of other income, consists of interest earned.

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

Level 1 Level 2 Level 3 Total

(In thousands)

Assets:

Level 1 Level 2 Level 3 Total

(In thousands)

Assets:

Cash held in demand deposit accounts of $100.8 million and $10.5 million is excluded from our fair-value hierarchy disclosure as of December 31, 2021 and 2020, respectively. There were no unrealized gains or losses associated with our short-term investments as of December 31, 2021 or 2020. The carrying amounts for receivables, accounts payable and accrued liabilities, and other current monetary assets and liabilities, including lease financing obligations, approximate fair value.

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

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Note 7—Certain Balance Sheet Accounts

Property and Equipment, Net

Property and equipment, net consists of the following:

December 31, December 31,

(In thousands)

Office equipment and furniture 625 625

Less accumulated depreciation and amortization (9,033) (7,647)

Total property and equipment, net $ 1,731 $ 2,551

For the years ended December 31, 2021, 2020 and 2019, depreciation and amortization expenses were $1.4 million, $1.6 million and $1.8 million, respectively.

Accrued Expenses

Accrued expenses consist of the following:

December 31, December 31,

(In thousands)

Sales rebates, fees and discounts $ 8,442 $ 3,326

Consulting and professional fees 7,455 5,393

Contract research and development 3,916 7,952

Other accrued expenses 2,013 810

Note 8—Line of Credit

We have a Loan and Security Agreement with Silicon Valley Bank (“SVB”), which provides for a $50.0 million revolving line of credit facility (the “Line of Credit Agreement”). The Line of Credit Agreement is secured by all our assets excluding intellectual property and development program inventories and matures in August 2022. In connection with the execution of the Asset Purchase Agreement, on December 1, 2021 the Company and SVB entered into a Consent and Second Amendment to the Line of Credit Agreement, under which SVB provided its consent to the Transaction and release of liens with respect to the transferred assets. In addition, the amendment revised the original Line of Credit Agreement to provide that the borrowing base will include 85% of eligible monthly royalty payments, including those from the Rayner and its affiliates, less applicable discounts, credits and other offsets.

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Interest on amounts outstanding is payable monthly at a floating rate equal to the greater of 5.50% and the prime rate per annum. If the Line of Credit Agreement is terminated prior to the maturity date for any reason other than replacement with a new SVB credit facility or a new syndicated facility in which SVB acts as the agent, we are required to pay a termination fee of $1.0 million. We paid an initial commitment fee of $150,000 upon closing and have paid additional commitment fees of $150,000 on each of the first and second anniversaries of the closing date.

The Line of Credit Agreement includes customary events of default that include, among other things, breach, non-payment, inaccuracy of representations and warranties, the occurrence of a material adverse change in our business or prospects for repayment of the Line of Credit Agreement, cross default to material indebtedness or material agreements, bankruptcy and insolvency, material judgments and a change in control. In the event of default, SVB may require all obligations under the Line of Credit Agreement to be immediately due and payable and charge a default rate of interest thereon. Additionally, under the loan and security agreement with SVB, we have agreed not to pay any dividends.

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

Note 9—Unsecured Convertible Senior Notes

On January 1, 2021, we adopted ASU 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) on a modified retrospective basis. ASU 2020-06 removes the separate liability and equity accounting for our convertible senior notes. Consequently, we now account for our convertible senior notes wholly as debt. Upon adoption, we removed the equity component allocated to debt issuance costs increasing unsecured convertible senior notes and shareholders’ equity by $75.5 million.

In November 2018, we issued $210.0 million in aggregate principal amount on our 2023 Notes, and in August and September 2020, we issued an aggregate principal amount of $225.0 million on our 2026 Notes. We used a portion of the proceeds from the 2026 Notes to repurchase $115.0 million principal amount of the 2023 Notes and terminate a corresponding portion of the related capped call.

Table of Contents

Unsecured convertible senior notes outstanding at December 31, 2021 and 2020, respectively, are as follows:

Balance as of December 31, 2021

(In thousands)

Unamortized debt issuance costs (1,282) (5,290) (6,572)

Balance as of December 31, 2020

(In thousands)

Unamortized issuance costs (837) (1,916)

Net carrying amount of equity component (2) $ 25,017 $ 61,628

2023 Convertible Senior Notes

In November 2018, we issued $210.0 million in aggregate principal amount on our 2023 Notes. The 2023 Notes are unsecured and accrue interest at an annual rate of 6.25% per annum, payable semi-annually in arrears on May 15 and November 15 of each year. The 2023 Notes mature on November 15, 2023 unless earlier purchased, redeemed or converted in accordance with their terms.

The 2023 Notes are convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 52.0183 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $19.22 per share of common stock), subject to adjustment in certain circumstances. To reduce the dilutive impact or potential cash expenditure associated with conversion of the 2023 Notes, we entered into a capped call transaction (the 2023 Capped Call), which essentially covers the number of shares of our common stock underlying the 2023 Notes when our common stock is trading between the initial conversion price of $19.22 per share and $28.84 per share. However, should the market price of our common stock exceed the $28.84 cap, then the conversion of the 2023 Notes would have an additional dilutive impact or may require a cash expenditure to the extent the market price exceeds the cap price.

OMER US Equity

OMER · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

OMER US Equity☆

OMER · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

OMER US Equity