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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, 2020

or

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)

(206676-5000

(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, $0.01 par value per share

OMER

The Nasdaq Stock Market LLC

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 5, 2020, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 61,652,326.

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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:

our expectations related to obtaining separate payment status for OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1%/0.3% from the Centers for Medicare & Medicaid Services (CMS), the impact of a long-term or permanent absence of separate payment status for OMIDRIA on our business and financial condition, and our expectations regarding reimbursement coverage for OMIDRIA by commercial and government payers;
our estimates regarding how long our existing cash, cash equivalents, short-term investments and revenues will be sufficient to fund our anticipated operating expenses, capital expenditures and debt service obligations;
our expectations relating to demand for OMIDRIA from wholesalers, ambulatory surgery centers (ASCs) and hospitals, and our expectations regarding OMIDRIA product sales;
our plans and expectations for an alternative commercial strategy for OMIDRIA;
the severity and duration of the impact of the COVID-19 pandemic on our business, operations, clinical programs and financial results;
our plans for the marketing and distribution of OMIDRIA and our estimates of OMIDRIA chargebacks and rebates, distribution fees and product returns;
our expectations regarding the clinical, therapeutic and competitive benefits and importance of OMIDRIA and our product candidates;
our ability to design, initiate and successfully complete clinical trials and other studies for our products and product candidates and our plans and expectations regarding our ongoing or planned clinical trials, including for our lead MASP-2 inhibitor, narsoplimab (also referred to as OMS721), and for our other investigational candidates, including OMS527 and OMS906;
our plans and expectations regarding development of narsoplimab for the treatment of COVID-19 or COVID-19-associated acute respiratory distress syndrome (ARDS), including statements regarding the therapeutic potential of narsoplimab for treatment of COVID-19 and/or ARDS, discussions with government agencies regarding narsoplimab for treatment of COVID-19 or ARDS, plans for future manufacturing of narsoplimab, expectations for the treatment of additional COVID-19 patients in clinical trials or other settings and our expectations for receiving any regulatory approval or authorization from FDA or other regulatory body for narsoplimab in the treatment of COVID-19 patients;
with respect to our narsoplimab clinical programs, our expectations regarding: whether enrollment in any or all ongoing and planned clinical trials will proceed as expected; whether we can capitalize on the financial and regulatory incentives provided by orphan drug designations granted by the U.S. Food and Drug Administration (FDA), the European Commission (EC), or the European Medicines Agency (EMA); and whether we can capitalize on the regulatory incentives provided by fast-track or breakthrough therapy designations granted by the FDA;

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our expectations regarding clinical plans and anticipated or potential paths to regulatory approval of narsoplimab by the FDA and EMA in hematopoietic stem cell transplant-associated thrombotic microangiopathy (HSCT-TMA), Immunoglobulin A (IgA) nephropathy, and atypical hemolytic uremic syndrome (aHUS);
whether and when we will complete the rolling Biologics License Application (BLA) for narsoplimab in HSCT-TMA and whether and when FDA will accept our submission and grant accelerated or regular approval;
whether and when a BLA may be filed with the FDA for narsoplimab in any other indication and whether FDA will grant accelerated or regular approval;
whether and when a marketing authorization application (MAA) may be filed with the EMA for narsoplimab in any indication, and whether the EMA will grant approval for narsoplimab in any indication;
our plans for the commercial launch of narsoplimab following any regulatory approval and our estimates and expectations regarding coverage and reimbursement for any approved products;
our expectation that we will rely on contract manufacturers to manufacture OMIDRIA for commercial sale and to manufacture our product candidates for purposes of clinical supply and in anticipation of potential commercialization;
our ability to raise additional capital through the capital markets or through one or more corporate partnerships, equity offerings, debt financings, collaborations, licensing arrangements or asset sales;
our expectations about the commercial competition that OMIDRIA and our product candidates, if commercialized, face or may face;
the expected course and costs of existing claims, legal proceedings and administrative actions, our involvement in potential claims, legal proceedings and administrative actions, and the merits, potential outcomes and effects of both existing and potential claims, legal proceedings and administrative actions, as well as regulatory determinations, on our business, prospects, financial condition and results of operations;
the extent of protection that our patents provide and that our pending patent applications will provide, if patents are issued from such applications, for our technologies, programs, products and product candidates;
the factors on which we base our estimates for accounting purposes and our expectations regarding the effect of changes in accounting guidance or standards on our operating results; and
our expected financial position, performance, revenues, growth, costs and expenses, magnitude of net losses and the availability of resources.

Our 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, 2020

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 Cash Flows

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

Part II — Other Information

36

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 6.

Exhibits

40

Signatures

41

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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, 

    

2020

    

2019

Assets

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

21,075

$

3,084

Short-term investments

 

132,448

 

57,704

Receivables, net

 

37,379

 

35,185

Inventory

 

1,542

 

1,147

Prepaid expense and other assets

 

3,541

 

6,625

Total current assets

 

195,985

 

103,745

Property and equipment, net

 

2,950

 

3,829

Right of use assets

26,116

27,082

Restricted investments

 

1,154

 

1,154

Advanced payments, non-current

 

870

 

1,159

Total assets

$

227,075

$

136,969

Liabilities and shareholders’ deficit

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

7,017

$

5,328

Accrued expenses

 

36,948

 

46,627

Current portion of lease liabilities

 

3,754

 

3,504

Total current liabilities

 

47,719

 

55,459

Lease liabilities, non-current

 

29,717

 

32,318

Unsecured convertible senior notes, net

 

232,808

 

158,213

Deferred tax liability

 

4,157

 

Commitments and contingencies (Note 8)

 

  

 

  

Shareholders’ deficit:

 

  

 

  

Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; none issued and outstanding at September 30, 2020 and December 31, 2019.

 

 

Common stock, par value $0.01 per share, 150,000,000 shares authorized at September 30, 2020 and December 31, 2019; 61,651,152 and 54,200,810 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.

 

616

 

542

Additional paid-in capital

 

747,457

 

625,048

Accumulated deficit

 

(835,399)

 

(734,611)

Total shareholders’ deficit

 

(87,326)

 

(109,021)

Total liabilities and shareholders’ deficit

$

227,075

$

136,969

See accompanying Notes to Condensed Consolidated Financial Statements

-5-

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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, 

    

2020

    

2019

    

2020

    

2019

Revenue:

Product sales, net

$

26,114

$

29,856

$

63,181

$

78,389

Costs and expenses:

 

 

  

 

 

  

Cost of product sales

 

401

 

278

 

815

 

464

Research and development

 

31,316

 

23,746

 

84,359

 

69,108

Selling, general and administrative

 

19,825

 

16,933

 

54,792

 

48,493

Total costs and expenses

 

51,542

 

40,957

 

139,966

 

118,065

Loss from operations

 

(25,428)

 

(11,101)

 

(76,785)

 

(39,676)

Loss on early extinguishment of debt

 

(13,374)

 

 

(13,374)

 

Interest expense

 

(6,882)

 

(5,715)

 

(18,763)

 

(16,846)

Other (expense) income

 

(633)

 

353

 

280

 

1,261

Loss before income taxes

 

(46,317)

 

(16,463)

 

(108,642)

 

(55,261)

Income tax benefit

 

7,854

 

 

7,854

 

Net loss

$

(38,463)

$

(16,463)

$

(100,788)

$

(55,261)

Comprehensive loss

$

(38,463)

$

(16,463)

$

(100,788)

$

(55,261)

Basic and diluted net loss per share

$

(0.66)

$

(0.33)

$

(1.81)

$

(1.12)

Weighted-average shares used to compute basic and diluted net loss per share

 

58,233,988

 

49,373,156

 

55,682,379

 

49,157,055

See accompanying Notes to Condensed Consolidated Financial Statements

-6-

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

Nine Months Ended September 30, 

    

2020

    

2019

Operating activities:

Net loss

$

(100,788)

$

(55,261)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

  

Stock-based compensation expense

 

11,122

 

10,468

Non-cash interest expense

 

8,169

 

6,790

Depreciation and amortization

 

1,218

 

1,262

Loss on early extinguishment of debt

 

13,374

 

Deferred income tax

 

(7,854)

 

Fair value settlement upon termination of cap call contract

 

838

 

Changes in operating assets and liabilities:

 

 

  

Receivables

 

(2,194)

 

(7,113)

Inventory

 

(395)

 

(1,085)

Prepaid expenses and other assets

 

3,533

 

959

Accounts payable and accrued expenses

 

(8,702)

 

6,921

Net cash used in operating activities

 

(81,679)

 

(37,059)

Investing activities:

 

  

 

  

Purchases of property and equipment

 

(283)

 

(318)

Purchases of investments

 

(133,190)

 

(594)

Proceeds from the sale and maturities of investments

 

58,446

 

36,750

Net cash (used in) provided by investing activities

 

(75,027)

 

35,838

Financing activities:

 

  

 

  

Proceeds from issuance of convertible senior notes, net of issuance costs

 

218,245

 

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

 

Proceeds upon exercise of stock options

 

4,978

 

5,034

Principal payments on finance lease liabilities

 

(889)

 

(813)

Net cash provided by financing activities

 

174,697

 

4,221

Net increase in cash and cash equivalents

 

17,991

 

3,000

Cash and cash equivalents at beginning of period

 

3,084

 

5,861

Cash and cash equivalents at end of period

$

21,075

$

8,861

Supplemental cash flow information

 

  

 

  

Cash paid for interest

$

8,564

$

6,811

Property acquired under finance lease

$

216

$

886

See accompanying Notes to Condensed Consolidated Financial Statements

-7-

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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, addiction 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 intercompany 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, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019 includes all adjustments, which include normal recurring adjustments, necessary to present fairly our interim financial information. The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from our audited financial statements but does not include all of the information and footnotes required by GAAP for audited annual financial information.

The accompanying unaudited condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the U.S. Securities and Exchange Commission (SEC) on March 2, 2020.

Risks and Uncertainties

In its 2021 outpatient prospective payment system (OPPS) proposed rule, the Centers for Medicare and Medicaid Services (CMS), a part of the Department of Health and Human Services (HHS), confirmed the October 1, 2020 expiration of pass-through reimbursement for OMIDRIA and indicated an intention to package payment for OMIDRIA with payment for the associated surgical procedure in both the hospital outpatient department (HOPD) and ambulatory surgery center (ASC) settings. We are continuing to pursue administrative and legislative avenues to secure separate payment for OMIDRIA; however, we cannot provide assurance that these efforts will be successful.

The outbreak of the novel strain of coronavirus (SARS-CoV-2) that causes COVID-19 and the responses to the global pandemic by various governmental authorities, the medical community and others continue to have a significant impact on our business. In March 2020, ASCs and hospitals using OMIDRIA postponed nearly all cataract surgery in response to recommendations from government and medical organizations. As a result, we did not record any sales of OMIDRIA to our wholesalers from March 25 to May 19, 2020. However, by the end of June 2020, the run rate of weekly OMIDRIA sales had recovered to levels approximating those seen prior to the pandemic. Due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, it is not possible to estimate precisely its impact on our business, operations or financial results; however, the impact has been and could continue to be material.

As of September 30, 2020, we had cash, cash equivalents and short-term investments of $153.5 million and an accounts receivable-based line of credit that allows us to borrow up to the lesser of $50.0 million or 85% of our accounts receivable borrowing base, less certain reserves. We have incurred losses from operations of $76.8 million for the nine months ended September 30, 2020, and cash used in operating activities was $81.7 million for the nine months ended

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September 30, 2020. We will continue to incur losses from operating activities until our revenues exceed operating costs and debt service obligations.

OMIDRIA pass-through reimbursement from CMS expired on October 1, 2020. If continued separate payment is determined not to be reasonably achievable in the near term, we have developed a commercial strategy that can be quickly implemented to lower the per-vial sales price of OMIDRIA to achieve substantially larger sales volumes. We believe that this approach would result in substantial revenues from OMIDRIA, in part because CMS Medicare Part B beneficiaries only represent approximately 45% of cataract surgery procedures annually.

We anticipate narsoplimab for HSCT-TMA will receive FDA approval and will launch in early to mid-2021. Currently we cannot fully predict the timing or the magnitude of narsoplimab revenues, but we believe they will be significant. Execution of our sales and marketing strategies for the launch of narsoplimab for HSCT-TMA is underway. These plans include various milestones at which we commit to incremental activities, providing for flexibility in the timing of costs incurred should the approval of narsoplimab be accelerated or delayed. If warranted, we will adjust the timing and associated costs of our HSCT-TMA launch activities as we advance through the biologics license application (BLA) review and approval process.

We plan to continue to fund our operations for at least the next twelve months with our cash and investments on hand, from sales of OMIDRIA and, if FDA approval is granted, from sales of narsoplimab for HSCT-TMA. There is also the possibility that we could generate revenue from sales of narsoplimab for the treatment of COVID-19. In addition, we may utilize funds available under our accounts receivable-based line of credit, which allows us to borrow up to 85% of our available accounts receivable borrowing base, less certain reserves, or $50.0 million, whichever is less. Should it be necessary or determined to be strategically advantageous, we also could pursue debt financings, public and private offerings of our equity securities similar to those we have completed previously, 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 through reduction of our expenses 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 revenue recognition, stock-based compensation expense and accruals for clinical trials, manufacturing of drug product and clinical drug supply and other contingencies. We base our estimates on historical experience and on various other factors, including the impact of the COVID-19 pandemic, that we believe are reasonable under the circumstances; however, actual results could differ from these estimates.

Revenue Recognition

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

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.

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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.

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.

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 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.

Recently Adopted Pronouncements

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 adopted the standard on January 1, 2020 and the adoption did not have a material impact on our consolidated financial statements and disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from U.S. GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under Topic 815, Derivatives and Hedging, or (2) a

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convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change is expected to reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the Company’s convertible senior notes. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share (EPS), which is consistent with the Company’s accounting treatment under the current standard. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020, and can be adopted on either a fully retrospective or modified retrospective basis. The Company is evaluating the impact of this pronouncement on its consolidated financial statements.

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, including elimination of 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 (for example, other comprehensive income). ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of this pronouncement on its consolidated financial statements. We have a history of losses and therefore have historically not made a provision for income taxes.

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, 2020 and 2019 were computed based on the shares of common stock outstanding during the respective periods. Potentially dilutive securities excluded from the diluted loss per share calculation are as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

    

2019

    

2020

    

2019

Outstanding options to purchase common stock

1,456,454

 

3,026,871

1,777,393

 

2,829,807

Outstanding warrants to purchase common stock

9,828

 

18,128

11,712

 

16,923

Total potentially dilutive shares excluded from loss per share

1,466,282

 

3,044,999

1,789,105

 

2,846,730

Note 3—Certain Balance Sheet Accounts

Accounts Receivable, net

Accounts receivable, net consist of the following:

September 30, 

December 31, 

    

2020

    

2019

(In thousands)

Trade receivables, net

$

37,218

$

35,074

Sublease and other receivables

 

161

 

111

Total accounts receivables, net

$

37,379

$

35,185

Trade receivables as of September 30, 2020 are shown net of $8.7 million of product return and chargeback allowances. Trade receivables as of December 31, 2019 are shown net of $1.6 million of chargeback allowances.

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Inventory

Inventory consists of the following:

September 30, 

December 31, 

    

2020

    

2019

 (In thousands)

Raw materials

 

$

79

 

$

91

Work-in-progress

 

797

 

338

Finished goods

 

666

 

718

Total inventory

 

$

1,542

 

$

1,147

Property and Equipment, Net

Property and equipment, net consists of the following:

    

September 30, 

    

December 31, 

2020

2019

(In thousands)

Finance leases

$

5,690

$

5,474

Laboratory equipment

 

2,903

 

2,844

Computer equipment

 

985

 

921

Office equipment and furniture

 

625

 

625

Total cost

 

10,203

 

9,864

Less accumulated depreciation and amortization

 

(7,253)

 

(6,035)

Total property and equipment, net

$

2,950

$

3,829

Depreciation expense for the three months ended September 30, 2020 and 2019 was $0.4 million for both periods, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $1.2 million and $1.3 million, respectively.

Accrued Expenses

Accrued expenses consist of the following:

    

September 30, 

    

December 31, 

2020

2019

(In thousands)

Sales rebates, fees and discounts

$

10,201

$

10,870

Contract research and development

8,813

24,107

Employee compensation

 

6,415

 

3,546

Consulting and professional fees

 

5,479

 

3,610

Interest payable

 

3,736

 

1,640

Clinical trials

 

1,482

 

1,982

Other accrued expenses

 

822

 

872

Total accrued expenses

$

36,948

$

46,627

Note 4—Fair-Value Measurements

As of September 30, 2020, and December 31, 2019, all investments were classified as short-term and available-for-sale on the accompanying Condensed Consolidated Balance Sheets. Investment income, which was included as a component of other income, consists of interest earned.

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

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

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

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

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

    

September 30, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

Assets:

Money-market funds classified as non-current restricted investments

$

1,154

$

$

$

1,154

Money-market funds classified as short-term investments

 

132,448

 

 

 

132,448

Total

$

133,602

$

$

$

133,602

    

December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

Assets:

  

 

  

 

  

 

  

Money-market funds classified as non-current restricted investments

$

1,154

$

$

$

1,154

Money-market funds classified as short-term investments

 

57,704

 

 

 

57,704

Total

$

58,858

$

$

$

58,858

Cash held in demand deposit accounts of $21.1 million and $3.1 million is excluded from our fair-value hierarchy disclosure as of September 30, 2020 and December 31, 2019, respectively. There were no unrealized gains or losses associated with our investments as of September 30, 2020 or December 31, 2019. The carrying amounts reported in the accompanying Condensed Consolidated Balance Sheets for receivables, accounts payable, other current monetary assets and liabilities approximate fair value.

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

Note 5—Line of Credit

We have a Loan and Security Agreement with Silicon Valley Bank, which provides for a $50.0 million revolving line of credit facility (the Line of Credit Agreement). Under the Line of Credit Agreement, we may draw, on a revolving basis, up to the lesser of $50.0 million or 85.0% of our eligible accounts receivable, less certain reserves. Interest on amounts outstanding is payable monthly at the greater of 5.5% and the prime rate. The line of credit is secured by all our assets excluding intellectual property and development program inventories.

As of September 30, 2020 and December 31, 2019, we had no outstanding borrowings under the Line of Credit Agreement.

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Note 6—Unsecured Convertible Senior Notes

Unsecured convertible senior notes outstanding at September 30, 2020 and December 31, 2019 are as follows:

Balance as of September 30, 2020

    

2023 Notes

    

2026 Notes

    

Total

(In thousands)

Principal amount

$

95,000

$

225,030

$

320,030

Unamortized discount

 

(18,276)

 

(62,591)

 

(80,867)

Unamortized issuance costs attributable to liability component

 

(1,583)

 

(4,772)

 

(6,355)

Total Convertible Senior Notes, net

$

75,141

$

157,667

$

232,808

Fair value of outstanding Convertible Senior Notes (2)

$

89,775

$

182,043

Amount by which the Convertible Senior Notes if-converted value exceeds their principal amount

$

$

Equity component

$

25,854

$

63,544

Unamortized issuance costs

 

(837)

 

(1,916)

Net carrying amount of equity component (1)

$

25,017

$

61,628

Balance as of December 31, 2019

    

2023 Notes

    

2026 Notes

    

Total

(In thousands)

Principal amount

$

210,000

$

$

210,000

Unamortized discount

 

(47,660)

 

 

(47,660)

Unamortized issuance costs attributable to liability component

 

(4,127)

 

 

(4,127)

Total Convertible Senior Notes, net

$

158,213

$

$

158,213

Fair value of outstanding Convertible Senior Notes (2)

$

208,163

$

Amount by which the Convertible Senior Notes if-converted value exceeds their principal amount

$

$

Equity component

$

57,152

$

Unamortized issuance costs

 

(1,851)

Net carrying amount of equity component (1)

$

55,301

$

(1)Included in the condensed consolidated balance sheet within additional paid-in capital
(2)The fair value is classified as Level 3 due to the limited trading activity for the Convertible Senior Notes.

2023 Convertible Senior Notes

On November 15, 2018, we issued $210.0 million in aggregate principal amount of our 6.25% Convertible Senior Notes (the 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 will be convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 52.0183 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $19.22 per share of common stock), subject to adjustment in certain circumstances. To reduce the dilutive impact or potential cash expenditure associated with conversion of the 2023 Notes, we entered into a capped call transaction (the 2023 Capped Call), which essentially covers the number of

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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.

On August 14, 2020, we issued $210.0 million aggregate principal amount of 5.25% Convertible Senior Notes (the 2026 Notes) and used $125.6 million of the net proceeds to repurchase $115.0 million principal amount of the 2023 Notes (see “2026 Convertible Senior Notes” below). The settlement consideration was allocated between the repurchase of the liability and the equity component with the fair value of the liability component estimated to be $103.6 million based on the expected future cash flows associated with the $115.0 million principal amount discounted at a 9.9% effective interest rate. The remaining $22.0 million was accounted for as a repurchase of the equity component, reducing additional paid-in capital. As of the repurchase date of August 14, 2020, the carrying value of the repurchased 2023 Notes, net of unamortized debt discount and issuance costs, was $90.2 million. The difference between the $103.6 million fair value of the 2023 Notes repurchased and the carrying value of $90.2 million resulted in a $13.4 million loss on early extinguishment of debt. After giving effect to the repurchase, the total principal amount outstanding on the 2023 Notes as of August 14, 2020 was $95.0 million.

In connection with the repurchase of $115.0 million in principal amount of the 2023 Notes, we entered into a capped call termination contract in August 2020 for approximately 6.0 million underlying shares to unwind a proportionate amount of the 2023 Capped Call. Upon settlement, the Company received $7.5 million in cash and recorded a $0.8 million loss due to the change in fair value of the contract between signing and settlement dates. The proceeds were recorded as an increase in additional paid-in capital and the loss was recorded to other expense in the condensed consolidated statements of operations and comprehensive loss. As of September 30, 2020, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.

The following table sets forth total interest expense recognized in connection with the 2023 Notes:

Three Months Ended September 30,

Nine Months Ended September 30,

    

2020

    

2019

    

2020

    

2019

(In thousands)

Contractual interest expense

$

2,363

$

3,281

$

8,925

$

9,844

Amortization of debt issuance costs

 

156

 

188

 

567

 

543

Amortization of debt discount

 

1,804

 

2,167

 

6,551

 

6,271

Total

$

4,323

$

5,636

$

16,043

$

16,658

2026 Convertible Senior Notes

In August 2020, we issued $210.0 million aggregate principal amount of 5.25% convertible senior notes. In September 2020, an additional $15.0 million aggregate principal amount was issued on the partial exercise of the underwriters’ option, which resulted in an aggregate principal amount outstanding of $225.0 million. The issuance of the notes and use of proceeds are below:

    

(In thousands)

2026 Notes issued

$

225,030

Termination of the 2023 Capped Call contracts related to debt repurchased

 

7,549

Repurchase of 2023 Notes

 

(125,638)

Purchase of 2026 Capped Call

 

(23,223)

Issuance costs

 

(6,785)

Net proceeds available for corporate use

$

76,933

The 2026 Notes are unsecured and accrue interest at an annual rate of 5.25% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The 2026 Notes mature on February 15, 2026, unless earlier purchased, redeemed or converted in accordance with their terms.

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The initial conversion rate is 54.0906 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $18.4875 per share of common stock), which equals approximately 12.2 million shares upon conversion, subject to adjustment in certain circumstances.

The 2026 Notes are convertible at the option of the holders on or after November 15, 2025 at any time prior to the close of business on February 12, 2026, the second scheduled trading day immediately before the stated maturity date of February 15, 2026. Additionally, holders may convert their 2026 Notes at their option at specified times prior to the maturity date only if:

(1)during any calendar quarter, beginning after September 30, 2020, that the last reported sale price per share of our common stock exceeds 130% of the conversion price of the 2026 Notes for each of at least 20 trading days in the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(2)during the five consecutive business days immediately after any five-consecutive-trading-day period (such five-consecutive-trading-day period, the “measurement period”) in which the trading price per $1,000 principal amount of 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;
(3)there is an occurrence of one or more certain corporate events or distributions of our common stock; or
(4)we call the 2026 Notes for redemption.

We may elect, at our sole discretion, to convert the 2026 Notes into cash, shares of our common stock or a combination thereof.

Subject to the satisfaction of certain conditions, we may redeem in whole or in part the 2026 Notes at our option beginning August 15, 2023 through the 50th scheduled trading day immediately before the maturity date at a cash redemption price equal to the principal amount of the 2026 Notes to be redeemed plus any accrued and unpaid interest to, but excluding, the redemption date. The 2026 Notes are subject to redemption only if certain requirements are satisfied, including that the last reported sale price per share of our common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice and (ii) the trading day immediately before the date we send such notice.

In order to reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2026 Notes, we entered into capped call transactions in connection with the initial issuance of the 2026 Notes and at the time of the issuance of additional 2026 Notes upon the underwriters’ partial exercise of their option (collectively, the 2026 Capped Call). The 2026 Capped Call will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2026 Notes, the number of shares of common stock underlying the 2026 Notes when our common stock is trading within the range of approximately $18.49 and $26.10. However, should the market price of our common stock exceed the $26.10 cap, then the conversion of the 2026 Notes would have a dilutive impact or may require a cash expenditure to the extent the market price exceeds the cap price. The 2026 Capped Call will expire on various dates over the 50-trading-day period ranging from December 2, 2025 to February 12, 2026, if not exercised earlier. The 2026 Capped Call is a separate transaction and not part of the terms of the 2026 Notes and was executed separately from the issuance of the 2026 Notes. The amount paid for the 2026 Capped Call was recorded as a reduction to additional paid-in capital in the condensed consolidated balance sheet.

We evaluated the accounting for the issuance of the 2026 Notes and concluded that 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 its balance sheet, and that the cash conversion guidance applies. Therefore, proceeds of $225.0 million are allocated first to the liability component based on the fair value of non-convertible debt with the residual proceeds allocated to the equity component for the conversion features. The Company

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allocated $6.8 million in issuance costs associated with the 2026 Notes to the liability and equity component in the same proportion as the $225.0 million in proceeds.

Further, we concluded the 2026 Capped Call qualifies for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity in its balance sheet. Consequently, the fair value of the 2026 Capped Call of $23.2 million is classified as equity and will not be subsequently remeasured.

In accounting for the issuance of the 2026 Notes, we separated the 2026 Notes into liability and equity components, using an effective interest rate of 12.5% to determine the fair value of the liability component.

The following table sets forth interest expense recognized related to the 2026 Notes:

    

Three and Nine

Months Ended

 September 30, 2020

(In thousands)

Contractual interest expense

$

1,444

Amortization of debt issuance costs

 

74

Amortization of debt discount

 

976

Total

$

2,494

Future minimum payments for the 2023 and 2026 Notes as of September 30, 2020 are as follows:

 

(In thousands)

2020

$

2021

 

2022

 

2023

 

95,000

2024

 

2025 and thereafter

 

225,030

Total future minimum payments under the convertible senior notes

 

$

320,030

Note 7—Leases

We have operating leases related to our office and laboratory space and finance leases for certain laboratory and office equipment as follows:

September 30, 

December 31, 

2020

    

2019

 (In thousands)

Assets

Operating lease assets

$

26,116

 

$

27,082

Finance lease assets, net

 

2,150

 

2,973

Total lease assets

$

28,266

 

$

30,055

Liabilities

Current:

Operating leases

$

2,619

 

$

2,282

Finance leases

 

1,135

 

1,222

Non-current:

Operating leases

 

28,767

 

30,772

Finance leases

 

950

 

1,546

Total lease liabilities

$

33,471

 

$

35,822

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The components of total lease cost are as follows:

Nine Months Ended

September 30, 

2020

 

2019

(In thousands)

Lease cost

  

    

  

Operating lease cost

$

4,540

$

3,121

Finance lease cost:

 

 

  

Amortization

 

1,039

 

984

Interest

 

224

 

248

Variable lease cost

 

1,715

 

1,699

Sublease income

 

(929)

 

(673)

Total lease cost

$

6,589

$

5,379

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

Nine Months Ended

September 30, 

2020

 

2019

(In thousands)

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows used for operating leases

$

6,490

$

4,962

Operating cash flows used for finance leases

$

224

 

$

248

Financing cash flows used for finance leases

$

889

 

$

813

Note 8—Commitments and Contingencies

Lease Agreements

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. As of September 30, 2020, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $48.2 million.

Contracts

We have various agreements with third parties that would collectively require payment of termination fees totaling $35.9 million if we had cancelled the work as of September 30, 2020.

Development Milestones and Product Royalties

We have licensed a variety of intellectual property from third parties that we are currently developing or may develop in the future. These licenses may require milestone payments in connection with clinical development or commercial milestones and/or 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, 2020 and 2019, development milestones were insignificant. We do not owe any royalties on OMIDRIA.

Note 9—Shareholders’ Deficit

Common Stock and Warrants

For the nine months ended September 30, 2020, we received proceeds of $5.0 million upon the exercise of stock options which resulted in the issuance of 550,342 shares of common stock. For the nine months ended September 30,

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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.

As of September 30, 2020 and December 31, 2019, we had 243,115 warrants outstanding with a weighted average exercise price of $20.68 per share.

Underwritten Public Offering of Common Stock

On August 14, 2020, we sold 6.9 million shares of our common stock at a public offering price of $14.50 per share. After deducting underwriter discounts and offering expenses, we received net proceeds from the transaction of $93.7 million.

Interim Condensed Consolidated Statements of Shareholders’ Deficit

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

Additional

Common

Paid-In

Accumulated

    

Stock

    

Capital

    

Deficit

Total

(In thousands)

Balance January 1, 2020

$

542

$

625,048

$

(734,611)

$

(109,021)

Exercise of stock options

3

2,709

2,712

Stock-based compensation expense

3,476

3,476

Net loss

(29,031)

(29,031)

Balance March 31, 2020

545

631,233

(763,642)

(131,864)

Exercise of stock options

66

66

Stock-based compensation expense

3,822

3,822

Net loss

(33,294)

(33,294)

Balance June 30, 2020

545

635,121

(796,936)

(161,270)

Issuance of common stock in direct offering, net of offering costs

69

93,606

93,675

Exercise of stock options

2

2,198

2,200

Stock-based compensation expense

3,824

3,824

Equity component of 2026 Notes, net of issuance costs

61,628

61,628

Purchases of 2026 Capped Calls

(23,223)

(23,223)

Equity component of early extinguishment of 2023 Notes

(22,073)

(22,073)

Termination of the 2023 Capped Call contracts related to debt repurchased

8,387

8,387

Tax benefit related to issuance of 2026 Notes, net of extinguishment

(12,011)

(12,011)

Net loss

(38,463)

(38,463)

Balance September 30, 2020

$

616

$

747,457

$

(835,399)

$

(87,326)

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Additional

Common

Paid-In

Accumulated

    

Stock

    

Capital

    

Deficit

Total

(In thousands)

Balance January 1, 2019

$

490

$

549,479

$

(650,125)

$

(100,156)

Exercise of stock options

108

108

Stock-based compensation expense

3,374

3,374

Net loss

(24,345)

(24,345)

Balance March 31, 2019

490

552,961

(674,470)

(121,019)

Exercise of stock options

2

1,598

1,600

Stock-based compensation expense

3,598

3,598

Net loss

(14,453)

(14,453)

Balance June 30, 2019

492

558,157

(688,923)

(130,274)

Exercise of stock options

3

3,323

3,326

Stock-based compensation expense

3,496

3,496

Net loss

(16,463)

(16,463)

Balance September 30, 2019

$

495

$

564,976

$

(705,386)

$

(139,915)

Note 10—Stock-Based Compensation

Stock-based compensation expense is as follows:

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

(In thousands)

Research and development

$

1,636

$

1,558

$

4,714

$

4,698

Selling, general and administrative

 

2,188

 

1,938

 

6,408