omer20230930

omer20230930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

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

For the transition period from to

Commission file number: 001-34475

OMEROS CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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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 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.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

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 ☒

As of November 7, 2023, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 62,865,491.

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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 currently available information. All statements other than statements of historical fact are “forward-looking statements.” Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “likely,” “look forward to,” “may,” “objective,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “slate,” “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:

● our estimates of future operating expenses and projections regarding how long our existing cash, cash equivalents, short-term investments, royalty receipts and potential revenues will fund our anticipated operating expenses, capital expenditures and debt service obligations;

● our expectations related to future royalties potentially payable to us under the terms of the asset purchase agreement under which we divested our former commercial ophthalmology product OMIDRIA®;

● our expectations regarding clinical plans and anticipated or potential paths to regulatory approval of narsoplimab by the U.S. Food and Drug Administration (“FDA”) and the European Medicines Agency (“EMA”) in hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”), COVID-19 or any other indication;

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

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

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

● our expectations regarding the clinical, therapeutic and competitive benefits and importance of our drug candidates;

● our ability to design, initiate and/or successfully complete clinical trials and other studies for our drug candidates and our plans and expectations regarding our ongoing or planned clinical trials;

● our expectations regarding: whether enrollment in any ongoing or planned clinical trial will proceed as expected; whether we can capitalize on the financial and regulatory incentives provided by orphan drug designations granted by FDA, the European Commission (“EC”), or the EMA; and whether we can capitalize on the regulatory incentives provided by fast-track or breakthrough therapy designations granted by FDA;

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

● our expectations about the commercial competition that our drug candidates, if commercialized, face or may face;

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

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

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

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

Our 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 (the “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 differ materially 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, 2023

INDEX

		Page
Part I — Financial Information		5
Item 1.	Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss	6
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
Part II — Other Information		30
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Default Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
Signatures		32

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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)

	*September 30,*			*December 31,*
	*2023*			*2022*
Assets
Current assets:
Cash and cash equivalents	$	30,640		$	11,009
Short-term investments		279,670			183,909
OMIDRIA contract royalty asset, short-term		29,228			28,797
Receivables		6,878			213,221
Prepaid expense and other assets		4,922			6,300
Total current assets		351,338			443,236
OMIDRIA contract royalty asset		119,502			123,425
Right of use assets		19,460			21,762
Property and equipment, net		1,717			1,492
Restricted investments		1,054			1,054
Total assets	$	493,071		$	590,969

Liabilities and shareholders’ equity (deficit)
Current liabilities:
Accounts payable	$	5,866		$	5,989
Accrued expenses		34,859			30,551
Current portion of unsecured convertible senior notes, net		94,909			94,381
Current portion of OMIDRIA royalty obligation		6,654			1,152
Current portion of lease liabilities		4,888			4,310
Total current liabilities		147,176			136,383
Unsecured convertible senior notes, net		221,828			220,906
OMIDRIA royalty obligation		118,770			125,126
Lease liabilities, non-current		19,249			22,426
Other accrued liabilities, non-current		—			444
Commitments and contingencies (Note 10)
Shareholders’ equity (deficit):
Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; none issued and outstanding at September 30, 2023 and December 31, 2022.		—			—
Common stock, par value $0.01 per share, 150,000,000 shares authorized at September 30, 2023 and December 31, 2022; 62,865,491 and 62,828,765 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively.		628			628
Additional paid-in capital		729,882			720,773
Accumulated deficit		(744,462	)		(635,717	)
Total shareholders’ equity (deficit)		(13,952	)		85,684
Total liabilities and shareholders’ equity (deficit)	$	493,071		$	590,969

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)

	*Three Months Ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2023*			*2022*			*2023*			*2022*

Costs and expenses:
Research and development	$	31,731		$	38,568		$	85,980		$	86,172
Selling, general and administrative		16,422			12,198			38,785			37,079
Total costs and expenses		48,153			50,766			124,765			123,251
Loss from operations		(48,153	)		(50,766	)		(124,765	)		(123,251	)
Interest expense		(7,916	)		(4,932	)		(23,781	)		(14,799	)
Interest and other income		4,413			906			12,913			2,069
Net loss from continuing operations		(51,656	)		(54,792	)		(135,633	)		(135,981	)
Net income from discontinued operations, net of tax		13,906			37,336			26,888			54,665
Net loss	$	(37,750	)	$	(17,456	)	$	(108,745	)	$	(81,316	)

Basic and diluted net income (loss) per share:
Net loss from continuing operations	$	(0.82	)	$	(0.87	)	$	(2.16	)	$	(2.17	)
Net income from discontinued operations		0.22			0.59			0.43			0.87
Net loss	$	(0.60	)	$	(0.28	)	$	(1.73	)	$	(1.30	)

Weighted-average shares used to compute basic and diluted net income (loss) per share		62,856,721			62,730,015			62,840,990			62,728,276

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

(unaudited)

					*Additional*
	*Common Stock*				*Paid-In*		*Accumulated*
	*Shares*		*Amount*		*Capital*		*Deficit*			*Total*
Balance at January 1, 2023		62,828,765	$	628	$	720,773	$	(635,717	)	$	85,684
Stock-based compensation expense		—		—		2,953		—			2,953
Net loss		—		—		—		(33,701	)		(33,701	)
Balance at March 31, 2023		62,828,765		628		723,726		(669,418	)		54,936
Exercise of stock options		19,556		—		97		—			97
Stock-based compensation expense		—		—		2,771		—			2,771
Net loss		—		—		—		(37,294	)		(37,294	)
Balance at June 30, 2023		62,848,321		628		726,594		(706,712	)		20,510
Exercise of stock options		17,170		—		53		—			53
Stock-based compensation expense		—		—		3,235		—			3,235
Net loss		—		—		—		(37,750	)		(37,750	)
Balance at September 30, 2023		62,865,491	$	628	$	729,882	$	(744,462	)	$	(13,952	)



Balance at January 1, 2022		62,628,855	$	626	$	706,288	$	(683,134	)	$	23,780
Exercise of stock options		101,160		1		413		—			414
Stock-based compensation expense		—		—		3,892		—			3,892
Net loss		—		—		—		(33,011	)		(33,011	)
Balance at March 31, 2022		62,730,015		627		710,593		(716,145	)		(4,925	)
Stock-based compensation expense		—		—		3,072		—			3,072
Net loss		—		—		—		(30,849	)		(30,849	)
Balance at June 30, 2022		62,730,015		627		713,665		(746,994	)		(32,702	)
Stock-based compensation expense		—		—		3,844		—			3,844
Net loss		—		—		—		(17,456	)		(17,456	)
Balance at September 30, 2022		62,730,015	$	627	$	717,509	$	(764,450	)	$	(46,314	)

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	*Nine Months Ended September 30,*
	*2023*			*2022*
Operating activities:
Net loss	$	(108,745	)	$	(81,316	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		8,959			10,808
Non-cash interest expense on unsecured convertible debt		1,450			1,361
Depreciation and amortization		715			789
Non-cash interest earned on OMIDRIA contract royalty asset		(11,484	)		(13,739	)
Remeasurement on OMIDRIA contract royalty asset		(14,924	)		(40,631	)
Accretion on U.S. government treasury bills, net		(7,280	)		—
Early termination of operating lease		—			(454	)
Changes in operating assets and liabilities:
Receivables		206,343			24,301
Prepaid expenses and other		876			1,769
OMIDRIA contract royalty asset		29,900			47,555
Accounts payable and accrued expense		3,741			(11,544	)
Net cash provided by (used in) operating activities		109,551			(61,101	)
Investing activities:
Purchases of investments and other		(839,595	)		(103,573	)
Proceeds from the sale and maturities of investments		751,114			84,600
Purchases of property and equipment		(308	)		(100	)
Net cash used in investing activities		(88,789	)		(19,073	)
Financing activities:
Proceeds from sale of future royalties		—			125,000
Principal payments on OMIDRIA royalty obligation		(854	)		—
Principal payments on finance lease obligations		(427	)		(515	)
Proceeds upon exercise of stock options and warrants		150			414
Net cash provided by (used in) financing activities		(1,131	)		124,899
Net increase in cash and cash equivalents		19,631			44,725
Cash and cash equivalents at beginning of period		11,009			100,808
Cash and cash equivalents at end of period	$	30,640		$	145,533

Supplemental cash flow information
Cash paid for interest	$	23,801		$	13,437
Property acquired under finance lease	$	632		$	806

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 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 disorders, including complement-mediated diseases, cancers and addictive and compulsive disorders. We marketed our first drug product, OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1% / 0.3% for use during cataract surgery or intraocular lens replacement in the United States (the “U.S.”) until we sold OMIDRIA and related business assets on December 23, 2021 (see “Sale of OMIDRIA Assets” below for additional information).

Our pipeline of clinical-stage development programs includes: narsoplimab, our antibody targeting mannan-binding lectin-associated serine protease 2 (“MASP-2”), the effector enzyme of the lectin pathway of complement; OMS1029, our long-acting antibody targeting MASP-2; OMS906, our antibody targeting mannan-binding lectin-associated serine protease-3 (“MASP-3”), the key activator of the alternative pathway of complement; and OMS527, our phophodiesterase 7 (“PDE7”) inhibitor.

In October 2023, we announced the results of a pre-specified interim analysis of our Phase 3 ARTEMIS-IGAN trial evaluating narsoplimab for the treatment of immunoglobulin A (“IgA”) nephropathy. Topline results showed that narsoplimab did not reach statistically significant improvement over placebo on the primary endpoint of reduction in proteinuria. Based on this result, we have discontinued the ARTEMIS-IGAN clinical trial. Clinical development of narsoplimab is currently focused primarily on hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). Our Biologics License Application (“BLA”) for narsoplimab in HSCT-TMA is anticipated to be resubmitted with additional information to support potential approval of narsoplimab in this indication. Phase 1 and Phase 2 clinical programs are underway in our other clinical-stage assets.

Sale of OMIDRIA Assets

On December 23, 2021, we sold our commercial product OMIDRIA and certain related assets including inventory and prepaid expenses to Rayner Surgical Inc. (“Rayner”). 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.

Under the Asset Purchase Agreement with Rayner (the “Asset Purchase Agreement”), we were entitled to receive a milestone payment of $200.0 million (the “Milestone Payment”) within 30 days following an event (the “Milestone Event”) that establishes separate payment for OMIDRIA for a continuous period of at least four years when furnished in the ambulatory surgery center (“ASC”) setting. In December 2022, the Milestone Event occurred and we recorded a $200.0 million milestone receivable. Upon the achievement of the Milestone Event, our royalties on U.S. net sales were reduced from 50% to 30% with royalties on net sales outside the U.S. remaining unchanged at 15%. We received the Milestone Payment together with accrued interest in February 2023.

As a result of the divestiture, the results of OMIDRIA operations (e.g., revenues and operating costs) are included in discontinued operations in our condensed 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 condensed 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 condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).

Liquidity and Capital Resources

As of September 30, 2023, we had cash, cash equivalents and short-term investments of $310.3 million. Our loss for the quarter ended September 30, 2023 was $37.8 million and our cash provided by operations for the nine months ended September 30, 2023 was $109.6 million, which included collection of the $200.0 million Milestone Payment in the first quarter of 2023. We have a $95.0 million principal payment due at maturity on our 2023 unsecured convertible senior notes on November 15, 2023, which we expect to pay on the maturity date from our existing cash and investments on hand.

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Historically, we have incurred net losses from continuing operations and negative operating cash flows. We have not yet established an ongoing source of revenue sufficient to cover our operating costs; therefore, we would need to continue to raise additional capital to accomplish our business plan and to retire our outstanding convertible senior notes due in 2026. We plan to continue to fund our operations for at least the next twelve months with our existing cash, investments and royalties from Rayner. We have a sales agreement in place for 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 also 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 technologies. Should it be necessary to manage our operating expenses, we could also reduce our projected cash requirements by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities.

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

Note 2—Significant Accounting Policies

OMIDRIA Royalties, Milestones and Contract Royalty Assets

We have rights to receive future royalties from Rayner on OMIDRIA net sales at royalty rates that vary based on geography and certain regulatory contingencies. Therefore, future OMIDRIA royalties are treated as variable consideration. The sale of OMIDRIA qualified as an asset sale under GAAP. To measure the OMIDRIA contract royalty asset we used the expected value approach, which is the sum of the discounted probability-weighted royalty payments we would receive using a range of potential outcomes to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur. As contemplated by the Asset Purchase Agreement, the royalty rate applicable to U.S. net sales of OMIDRIA was reduced from 50% to 30% upon the occurrence, in December 2022, of the event triggering the $200.0 million Milestone Payment. Consequently, in December 2022, we revalued the OMIDRIA contract royalty asset using the 30% royalty rate on U.S. net sales and adjusted the probability-weighted outcomes to reflect the occurrence of the Milestone Event. Royalties earned are recorded as a reduction to the OMIDRIA contract royalty asset. The amount recorded in discontinued operations in future periods will reflect interest earned on the outstanding OMIDRIA contract royalty asset at an effective interest rate of 11.0% and any amounts we receive that are different from the expected royalties. The OMIDRIA contract royalty asset will be re-measured periodically using the expected value approach based on actual results and future expectations. Any required adjustment to the OMIDRIA contract royalty asset will be recorded in discontinued operations.

OMIDRIA Royalty Obligation

On September 30, 2022, we sold to DRI Healthcare Acquisitions LP (“DRI”) an interest in a portion of our future OMIDRIA royalty receipts for a purchase price of $125.0 million in cash (see “Note 8 – OMIDRIA Royalty Obligation”).

The $125.0 million cash consideration obtained is classified as a liability and is recorded as an “OMIDRIA royalty obligation” on our condensed consolidated balance sheet. The liability is being amortized over the term of the arrangement using the implied effective interest rate of 9.4% and interest expense is recorded as a component of continuing operations.

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To the extent our estimates of future royalties differ materially from previous estimates, we will adjust the carrying amount of the liability for future OMIDRIA royalties to the present value of the revised estimated cash flows, discounted at the original effective interest rate of 9.4% utilizing the cumulative catch-up method. The offset to the adjustment would be recognized as a component of net income (loss) from continuing operations.

Inventory

We expense inventory costs related to product candidates as research and development expenses until regulatory approval is reasonably assured in the U.S. or the European Union (“EU”). Once approval is reasonably assured, costs, including amounts related to third-party manufacturing, transportation and internal labor and overhead, will be capitalized.

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 lease obligations 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 finance lease obligations 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 an operating expense.

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments, including grants of stock option awards and restricted stock units (“RSU”) based on estimated fair values. The fair value of our stock is calculated using the Black-Scholes valuation model, which requires judgmental assumptions around volatility, risk-free rates, forfeiture rates and expected option life. Compensation expense is recognized over the requisite service periods, which is generally the vesting period, using the straight-line method. Forfeiture expense is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates.

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 basis. 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.

Note 3—Discontinued Operations

On December 23, 2021, we sold OMIDRIA and certain related assets including inventory and prepaid expenses to Rayner.

Under the Asset Purchase Agreement, the achievement of the Milestone Event in December 2022 triggered a $200.0 million Milestone Payment from Rayner and a reduction in the U.S. royalty rate from 50% to 30% on OMIDRIA net sales until the expiration or termination of the last issued and unexpired U.S. patent, which we expect to occur no earlier than 2033. The Milestone Event resulted in recognition of the $200.0 million Milestone Payment, which we received in February 2023. Upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment, the U.S. base royalty rate would be further reduced to 10%.

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The sale of OMIDRIA was recorded as an asset sale. Additionally, the results of operations related to OMIDRIA are recorded as income from discontinued operations for all periods presented in the condensed consolidated statements of operations and comprehensive loss.

The following schedule presents a roll forward of the OMIDRIA contract royalty asset (in thousands):

OMIDRIA contract royalty asset at December 31, 2022	$	152,222
Royalties earned		(29,900	)
Interest earned on OMIDRIA contract royalty asset		11,484
Remeasurement adjustments		14,924
OMIDRIA contract royalty asset at September 30, 2023	$	148,730

Net income from discontinued operations is as follows:

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2023*		*2022*		*2023*		*2022*
	(In thousands)
Interest earned on OMIDRIA contract royalty asset	$	3,730	$	4,356	$	11,484	$	13,739
Remeasurement adjustments		10,100		32,917		14,924		40,631
Other income, net		76		63		480		295
Net income from discontinued operations, net of tax	$	13,906	$	37,336	$	26,888	$	54,665

Cash flow from discontinued operations is as follows:

	*Nine Months Ended*
	*September 30,*
	*2023*		*2022*
	(In thousands)
Net cash provided by discontinued operations from operating activities	$	232,081	$	60,188

Net cash provided by discontinued operations primarily represents royalties received and the $200.0 million Milestone Payment that we collected from Rayner in February 2023. 

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Note 4—Net Loss Per Share

Our potentially dilutive securities include potential common shares related to our stock options, RSUs 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:

Three Months Ended

Nine Months Ended

September 30,

2023

2022

2023

2022

2026 Notes convertible to common stock ⁽¹⁾

12,172,008

2023 Notes convertible to common stock ⁽¹⁾

SEC Form 10-Q filed by Omeros Corporation