OMEROS CORP - Quarter Report: 2019 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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For the quarterly period ended September 30, 2019

or

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For the transition period from                      to

Commission file number: 001-34475

OMEROS CORPORATION

(Exact name of registrant as specified in its charter)

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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  ⌧    No  ◻

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  ⌧    No  ◻

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.

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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. ◻

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

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As of November 8, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 49,747,818.

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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 (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) which are subject to the “safe harbor” created by those sections for such statements. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical fact are “forward-looking statements.” Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” 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:

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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 (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 SEPTEMBER 30, 2019

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)

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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)

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See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

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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 segment. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018 includes all adjustments, which include normal recurring adjustments, necessary to present fairly our interim financial information. The Condensed Consolidated Balance Sheet at December 31, 2018 has been derived from our audited financial statements but does not include all of the information and footnotes required by GAAP for audited annual financial information.

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

We continue to advance a series of clinical and preclinical programs (including three programs currently in Phase 3). The Centers for Medicare & Medicaid Services (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, OMIDRIA pass-through reimbursement was reinstated for a two-year period. In its 2020 outpatient prospective payment system (OPPS) final rule, issued on November 1, 2019, CMS declined to grant separate payment to OMIDRIA beyond the expiration of its current pass-through status on September 30, 2020. CMS also noted in the 2020 final rule that it would continue to analyze evidence and monitor utilization of OMIDRIA. We cannot at this time predict with precision future OMIDRIA revenues due to the uncertain impact of the 2020 OPPS final rule on sales of OMIDRIA in 2019 and 2020. As a result, despite our record OMIDRIA sales over consecutive quarters, meaningful growth in OMIDRIA sales in the fourth quarter 2019 and 2020 are not included in the determination regarding our prospects as a going concern. Similarly, we are unable to include in the determination amounts available under our revolving 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. 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 November 12, 2020 and, therefore, to continue as a going concern.

We plan to continue to fund a portion of our operations through proceeds from sales of OMIDRIA and, if necessary, through other revenue sources and financial instruments as noted above. If these capital sources, for any reason, are needed but inaccessible, it would have a significantly negative effect our financial condition. Should it be necessary to manage our operating expenses, we would reduce our projected cash requirements through reduction of our

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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 contingencies. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances; however, actual results could differ from these estimates.

Revenue Recognition

When we enter into a customer contract, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.

Product Sales, Net

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

Right-of-Use Assets and Related Lease Liabilities

On January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases, (Topic 842) using a modified retrospective approach versus recasting the prior periods presented. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical assessment of whether (i) contracts contain leases, (ii) lease classifications and (iii) 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 included 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.

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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 and directors, with certain exceptions. The adoption was immaterial to our consolidated financial statements.

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

Recent Accounting Pronouncement Not Yet Adopted

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments — Credit Losses, (Topic 326) which changes how entities account for credit losses on most financial assets and certain other instruments, and expands disclosures. The standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. We expect to adopt the standard on January 1, 2020 and are still in process of evaluating the effect of adoption on our consolidated financial statements and disclosures.

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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 and nine months ended September 30, 2019 and 2018 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:

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Note 3—Certain Balance Sheet Accounts

Accounts Receivable, net

Accounts receivable, net consist of the following:

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Trade receivables are shown net of $1.5 million and $0.4 million of chargeback and product return allowances as of September 30, 2019 and December 31, 2018, respectively.

Inventory

Inventory consists of the following:

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Property and Equipment, Net

Property and equipment, net consists of the following:

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For the nine months ended September 30, 2019 and 2018, depreciation and amortization expenses were $1.3 million and $0.7 million, respectively.

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Accrued Expenses

Accrued expenses consist of the following:

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Note 4—Fair-Value Measurements

As of September 30, 2019, and December 31, 2018, all investments were classified as short-term and available-for-sale on the accompanying Condensed Consolidated Balance Sheets. Investment income, which was included as a component of other income, consists of interest earned.

On a recurring basis, we measure certain financial assets at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

Level 1—Observable inputs for identical assets or liabilities, such as quoted prices in active markets;

Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3—Unobservable inputs in which little or no market data exists, therefore they are developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

Our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis are as follows:

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Cash held in demand deposit accounts of $8.9 million and $5.9 million is excluded from our fair-value hierarchy disclosure as of September 30, 2019 and December 31, 2018, respectively. There were no unrealized gains or losses associated with our short-term investments as of September 30, 2019 or December 31, 2018. The carrying amounts reported in the accompanying Condensed Consolidated Balance Sheets for receivables, accounts payable, other current monetary assets and liabilities approximate fair value.

Note 5—Debt

2016 CRG Loan Agreement

In 2016, we entered into a term loan agreement with CRG Servicing LLC (the CRG Loan) and borrowed $80.0 million thereunder. In May 2018, we borrowed the remaining $45.0 million available under the CRG Loan and issued warrants to purchase up to 200,000 shares of our common stock with an exercise price of $23.00 per share. The warrants have a five-year term and remained outstanding as of September 30, 2019.

In November 2018, we issued $210.0 million in principal amount of 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.

2019 Silicon Valley Bank Line of Credit Agreement

On August 2, 2019, we entered into a Loan and Security Agreement with Silicon Valley Bank (the Loan Agreement), which 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.

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 Loan Agreement is terminated prior to the maturity date for any reason other than replacement with a new Silicon Valley Bank (SVB) credit facility or a new syndicated facility in which SVB acts as the agent, we are required to pay a termination fee equal to 2.0% of the revolving line facility (or $1.0 million). We paid an initial commitment fee of $150,000 upon closing and are required to pay additional commitment fees of $150,000 on each of the first and second anniversaries of the closing date, or upon the earlier termination of, or default under, the Loan Agreement.

The Loan Agreement requires a lockbox arrangement whereby our trade accounts receivable collections are deposited into a control account. Amounts deposited in the account are transferred daily to our operating account, except that during periods of reduced liquidity or upon an event of default, the amounts received in the control account are applied to reduce the outstanding obligations under the Loan Agreement. The Loan 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 loan, 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 Loan Agreement to be immediately due and payable and charge a default rate of interest thereon.

As of September 30, 2019, we had no outstanding borrowings under the Loan Agreement.

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Note 6—Convertible Senior Notes

On November 15, 2018, we issued at face value $210.0 million aggregate principal amount of our 6.25% Convertible Senior Notes due 2023 (the Convertible Notes). The 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 on May 15, 2019.

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. As of September 30, 2019, all Convertible Notes remain outstanding.

The balance of our Convertible Notes at September 30, 2019 and December 31, 2018, is as follows:

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For more details on 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.

Note 7—Lease Liabilities

We have operating leases related to our office and laboratory space. 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 2023.

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As described further in Note 1 – “Organization and Significant Accounting Policies”, on January 1, 2019, we adopted ASU 2016-02, Leases, (Topic 842) using a modified retrospective approach versus recasting the prior periods presented. 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.

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The components of total lease costs are as follows:

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

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The future maturities of our lease liabilities as of September 30, 2019 are as follows:

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In September 2019, we recognized a new lease component associated with additional office space in our headquarters building and recorded additional lease liability of $3.7 million. In October 2019, we leased additional office and laboratory space in our headquarters building and recorded the associated lease liability of $3.9 million.

Note 8—Commitments and Contingencies

Contracts

We have various agreements with third parties that would collectively require payment of termination fees totaling $22.6 million as of September 30, 2019 if we cancel the work within specific time frames, either prior to commencing or during performance of the contracted services.

Development Milestones and Product Royalties

We have licensed a variety of intellectual property from third parties that we are currently developing or may develop in the future. These licenses may require milestone payments during clinical development as well as low single to low double-digit royalties on the net income or net sales of the product. For the three and nine months ended September 30, 2019 and the year ended December 31, 2018, development milestones incurred were insignificant and we did not owe any royalties.

Note 9—Shareholders’ Deficit

Common Stock

For the nine months ended September 30, 2019, we received proceeds of $5.0 million upon the exercise of stock options which resulted in the issuance of 513,790 shares of common stock. For the nine months ended September 30, 2018, we received proceeds of $6.7 million upon the exercise of stock options and warrants which resulted in the issuance of 763,575 shares of common stock.

Warrants

In connection with the April 2018 amendment to the CRG Loan, we issued warrants to purchase up to 200,000 shares of our common stock with an exercise price of $23.00 per share and total fair value of $1.4 million. The warrants have a five-year term and remain outstanding as of September 30, 2019.

In September 2018, other warrant holders with a right to purchase 57,487 shares of our common stock exercised their warrants. In conjunction with this cashless exercise, we issued 34,509 shares of our common stock. As of September 30, 2019, 43,115 of these warrants remain outstanding. The warrants are exercisable through May 18, 2023.

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Interim Condensed Consolidated Statements of Shareholders’ Deficit

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

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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 as follows:

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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:

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

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