What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-28 compared with 2021-03-25 · 314 added, 241 removed, 472 unchanged (54% of the section changed)

Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statements of Operations and Comprehensive Income (Loss )

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

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Notes to Consolidated Financial Statements

R EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Harmony Biosciences Holdings, Inc.

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We have audited the accompanying consolidated balance sheets of Harmony Biosciences Holdings, Inc.

and subsidiary (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity (deficit), and cash flows, for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

and subsidiary (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), convertible preferred stock and stockholders’ equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 3 to the financial statements, effective January 1, 2021, the Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-02, Leases (Topic 842) , using the modified retrospective approach which does not require prior periods to be restated.

Basis for Opinion

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Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Gross to Net Rebate Accrual for Medicaid – “Refer to Note 3-Product Sales, Net” to the financial statements

Critical Audit Matter Description

As more fully disclosed in Note 3 to the financial statements, the Company reduces gross product sales from list price at the time revenue is recognized for expected charge-backs, discounts, rebates, and sales allowances, which are referred to as gross-to-net (“GTN”) adjustments.

These reductions are attributed to various commercial arrangements, managed healthcare organizations, and government programs that mandate various reductions from list price.

Charge-backs and cash discounts are reflected as a reduction to receivables and settled through the issuance of credits to the customer.

All other rebates, discounts and adjustments, are reflected as a liability and settled through cash payments.

The GTN liability related to the U.S.

Medicaid government program (the “Medicaid rebate accrual”) involves the use of significant assumptions and judgments in the Company’s calculation.

These significant assumptions and judgments include consideration of legal interpretations of applicable laws and regulations, historical claims experience, payer channel mix, current contract prices, unbilled claims, claims submission time lags, and inventory levels in the distribution channel.

Given the complexity involved in determining the significant assumptions used in calculating the Medicaid rebate accrual, auditing these estimates involved especially subjective judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the Medicaid rebate accrual included the following, among others:

● We evaluated the appropriateness and consistency of the Company’s methods and assumptions used to calculate the Medicaid rebate accrual.

● We tested the effectiveness of internal controls over the review of the Company’s estimation model, including underlying assumptions and key inputs into the Company’s process to calculate the Medicaid rebate accrual.

● We tested the mathematical accuracy of the Medicaid rebate accrual.

● We tested significant assumptions and key inputs used to calculate the Medicaid rebate accrual.

● We evaluated the Company’s ability to estimate the Medicaid rebate accrual accurately by comparing actual amounts incurred for the Medicaid rebate accrual to historical estimates.

● We tested the overall reasonableness of the Medicaid rebate accrual recorded at period end by developing an expectation for comparison to actual recorded balances.

/s/ Deloitte & Touche LLP

Chicago, Illinois

March 25, 2021

February 28, 2022

We have served as the Company’s auditor since 2017.

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Restricted cash

Intangible asset, net

Intangible assets, net

Other noncurrent assets

Total noncurrent assets

LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

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Accrued expenses

Current portion of long term debt

Other current liabilities

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NONCURRENT LIABILITIES:

Deferred rent

Long term debt, net

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COMMITMENTS AND CONTINGENCIES (Note 9)

CONVERTIBLE PREFERRED STOCK

Convertible preferred stock, net of placement costs

Series A convertible preferred stock - $1.00 stated value;

0 shares and 286,000,000 shares authorized at December 31, 2020 and 2019, respectively;

0 shares and 285,000,000 shares issued and outstanding at December 31, 2020 and 2019, respectively

Series B convertible preferred stock - $1.25 stated value;

0 shares and 8,030,000 shares authorized at December 31, 2020 and 2019, respectively;

0 shares and 8,000,000 shares issued and outstanding at December 31, 2020 and 2019, respectively

Series C convertible preferred stock - $1.96 stated value;

0 shares and 25,600,000 shares authorized at December 31, 2020 and 2019, respectively;

0 shares and 25,510,205 shares issued and outstanding at December 31, 2020 and 2019, respectively

STOCKHOLDERS’ EQUITY (DEFICIT):

STOCKHOLDERS’ EQUITY:

Preferred stock - $ 0.00001 par value;

10,000,000 shares and 0 shares authorized at December 31, 2020 and 2019, respectively;

0 shares issued and outstanding at December 31, 2020 and 2019, respectively

10,000,000 shares and 00 shares authorized at December 31, 2021 and December 31, 2020, respectively;

00 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively

Common stock— $ 0.00001 par value;

500,000,000 shares and 423,630,000 shares authorized at December 31, 2020 and 2019, respectively;

56,890,569 shares and 7,787,470 issued and outstanding at December 31, 2020 and 2019, respectively

500,000,000 shares authorized at December 31, 2021 and December 31, 2020, respectively;

58,825,769 shares and 56,890,569 issued and outstanding at December 31, 2021 and December 31, 2020, respectively

Additional paid in capital

Accumulated deficit

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’

EQUITY (DEFICIT)

TOTAL STOCKHOLDERS’ EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of the consolidated financial statements

HARMONY BIOSCIENCES HOLDINGS, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share data)

Year Ended December 31,

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Loss on debt extinguishment

Other expense, net

Other income (expense), net

Interest expense, net

Loss before income taxes

Net loss and comprehensive loss

Income (loss) before income taxes

Income tax expense

Net income (loss) and comprehensive income (loss)

Accumulation of dividends on preferred stock

Net loss available to common stockholders

NET LOSS PER SHARE:

Net income (loss) available to common stockholders

EARNINGS (LOSS) PER SHARE:

Weighted average number of shares of common stock - basic

Weighted average number of shares of common stock -

Weighted average number of shares of common stock - diluted

The accompanying notes are an integral part of the consolidated financial statements

HARMONY BIOSCIENCES HOLDINGS, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share and per share data)

AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED

STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except share and per share data)

Convertible Preferred

stockholders’

Series A, B, & C

stockholders’ equity

Balance as of December 31, 2018

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Conversion of Series A, B, C convertible stock to common stock

( 318,510,205 )

Reclassification of warrant liability to equity

Exercise of options

Exercise of stock options

Stock-based compensation

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Balance as of December 31, 2020

Issuance of common stock

Exercise of options

Stock-based compensation

Balance as of December 31, 2021

(1) Common stock of Harmony Biosciences Holdings, Inc.

The accompanying notes are an integral part of the consolidated financial statements

HA RMONY BIOSCIENCES HOLDINGS, INC.

HARMONY BIOSCIENCES HOLDINGS, INC.

AND SUBSIDIARY

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CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

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

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Milestones associated with acquired in-process research & development (IPR&D)

Stock-based compensation expense

Stock-based and employee stock purchase compensation expense

Stock appreciation rights market adjustment

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Other non-current liabilities

Net cash used in operating activities

Net cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment

Milestone associated with acquired in-process research & development (IPR&D)

Milestone and acquisition of intangible asset

Milestone payments

Net cash used in investing activities

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Initial public offering issuance costs

Proceeds from issuance of common stock

Common stock issuance costs

Proceeds from issuance of preferred stock

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Extinguishment of debt exit fees

Principal repayment of long term debt

Proceeds from exercised options

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Net cash provided by financing activities

NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period

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Cash paid during the year for interest

Cash paid during the year for milestones

Cash paid during the year for taxes

Supplemental Disclosures of Noncash Investing and Financing Activities:

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ORGANIZATION AND DESCRIPTION OF BUSINESS

Our operating subsidiary, Harmony Biosciences, LLC, was formed on May 17, 2017.

Harmony Biosciences Holdings, Inc.

(the “Company”) was founded on July 25, 2017 as Harmony Biosciences II, LLC, a Delaware limited liability company, and the Company converted to a Delaware corporation named Harmony Biosciences II, Inc.

on September 19, 2017.

On February 3, 2020, the Company changed its name to Harmony Biosciences Holdings, Inc.

(the “Company”) was founded in July 2017 as Harmony Biosciences II, LLC, a Delaware limited liability company, and the Company converted to a Delaware corporation named Harmony Biosciences II, Inc.

in September 2017.

In February 2020, the Company changed its name to Harmony Biosciences Holdings, Inc.

The Company is a holding company and has no operations.

The Company’s operations are conducted in its wholly owned subsidiary, Harmony Biosciences, LLC (“Harmony”).

The Company’s operations are conducted in its wholly owned subsidiary, Harmony Biosciences, LLC (“Harmony”), which was formed in May 2017.

The Company is a commercial-stage pharmaceutical company focused on developing and commercializing innovative therapies for patients living with rare neurological disorders who have unmet medical needs.

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Initial Public Offering

On August 21, 2020, the Company completed its initial public offering (“IPO”) of common stock, in which it sold 6,151,162 shares, including 802,325 shares pursuant to the underwriters’ over-allotment option.

The shares began trading on the Nasdaq Global Market on August 19, 2020.

In August 2020, the Company completed its initial public offering (“IPO”) of common stock, in which it sold 6,151,162 shares, including 802,325 shares pursuant to the underwriters’ over-allotment option.

The shares were sold at an IPO price of $ 24.00 per share for net proceeds of approximately $ 135,435 , after deducting underwriting discounts and commissions and offering expenses of approximately $ 12,193 payable by the Company.

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Reverse Stock Split

On August 11, 2020, the Company implemented a 1-for-8.215 reverse stock split of the Company’s common stock.

In August 2020, the Company implemented a 1-for-8.215 reverse stock split of the Company’s common stock.

All share and per share data shown in the accompanying financial statements and related notes have been retroactively revised to reflect the reverse stock split.

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The consolidated financial statements have been prepared as though the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company has incurred operating losses and negative cash flows from operations since inception resulting in an accumulated deficit of $488,195 and $422,862, as of December 31, 2020 and 2019, respectively.

Prior to the year ended December 31, 2021, the Company had incurred operating losses and negative cash flows from operations resulting in an accumulated deficit of $ 453,598 and $ 488,195 , as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, the Company had cash and cash equivalents of $ 234,309 .

On August 21, 2020, the Company received aggregate proceeds from a common stock offering of approximately $135,435, net of underwriting discounts and commissions and other estimated offering expenses (see Note 11).

Additionally, on January 9, 2020, the Company received aggregate proceeds of approximately $200,000 through the loan agreement with OrbiMed Royalty & Credit Opportunities, LP.

This capital raise and debt issuance has resolved the Company’s significant risks and uncertainties regarding sources of liquidity, which previously raised substantial doubt about the Company’s ability to continue as a going concern.

The Company believes that its anticipated cash from operating and financing activities and existing cash and cash equivalents will enable the Company to meet its operational liquidity needs and fund its planned investing activities for the next twelve months from the date of issuance of these consolidated financial statements.

The Company believes that its existing cash and cash equivalents on hands as December 31, 2021, as well as additional cash generated from operating and financing activities will enable the Company to meet its operational liquidity needs and fund its planned investing activities for the next twelve months from the date of issuance of these consolidated financial statements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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Operating Segments

The Company holds all its tangible assets, conducts its operations, and revenues are generated in the U.S.

The Company holds all its tangible assets, conducts its operations, and generates its revenues in the U.S.

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Makers in deciding how to allocate resources to an individual segment and in assessing performance.

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Restricted cash

Total cash, cash equivalents, and restricted cash shown in the statements

of cash flows

Total cash, cash equivalents, and restricted cash shown in the statements of cash flows

Amounts included in restricted cash represent those amounts required to be held as a security deposit in the form of letters of credit for the Company’s credit card program and the fleet program.

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The Company monitors its exposure within accounts receivable and records a reserve against uncollectible accounts receivable as necessary.

The Company extends credit to specialty pharmaceutical distribution companies within

the United States.

The Company extends credit to specialty pharmaceutical distribution companies within the United States.

Customer creditworthiness is monitored and collateral is not required.

Historically, the Company has not experienced credit losses on its accounts receivable.

As of December 31, 2020, three customers accounted for 100% of gross accounts receivable, Caremark LLC (“CVS Caremark”), which accounted for 44% of gross accounts receivable;

PANTHERx Specialty Pharmacy LLC (“Pantherx”), which accounted for 23% of gross accounts receivable;

and Accredo Health Group, Inc.

As of December 31, 2021, three customers accounted for 100 % of gross accounts receivable, Accredo Health Group, Inc.

(“Accredo”), which accounted for 40 % of gross accounts receivable;

As of December 31, 2019, two customers accounted for 91% of gross accounts receivable;

CVS Caremark, which accounted for 72% of gross accounts receivable, and Pantherx, which accounted for 19% of gross accounts receivable.

PANTHERx Specialty Pharmacy LLC (“Pantherx”), which accounted for 31 % of gross accounts receivable;

Caremark LLC (“CVS Caremark”), which accounted for 29 % of gross accounts receivable.

As of December 31, 2020, three customers accounted for 100 % of gross accounts receivable;

CVS Caremark, which accounted for 44 % of gross accounts receivable, Pantherx, which accounted for 23 % of gross accounts receivable and Accredo, which accounted for 33 % of gross accounts receivable.

For the year ended December 31, 2021, three customers accounted for 100 % of gross product revenues;

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and Accredo accounted for 29 % of gross product revenues.

For the year ended December 31, 2019 two customers accounted for 88% of gross product revenues, CVS Caremark accounted for 59% of gross product revenues and Pantherx accounted for 29% of gross product revenues.

For the year ended December 31, 2020, three customers accounted for 100 % of gross product revenues, CVS Caremark accounted for 40 % of gross product revenues;

Pantherx accounted for

33 % of gross products revenues;

and Accredo accounted for 27 % of gross product revenues.

For the year ended December 31, 2019, two customers accounted for 88 % of gross product revenues;

CVS Caremark accounted for 59 % of gross product revenues and Pantherx accounted for 29 % of gross product revenues.

The Company depends on a single source supplier for its product, product candidates and their active pharmaceutical ingredient.

Inventories are valued at the lower of cost or net realizable value.

Cost is determined using the first-in, first-out method for all inventories.

Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements.

The estimate of excess quantities is subjective and primarily dependent on our estimates of future demand for a particular product.

Inventory is valued at the lower of cost or net realizable value.

Cost is determined using the specific identification method for all inventory.

Our policy is to write down inventory that has become obsolete, that has a cost basis in excess of its expected net realizable value and/or that we have quantities in excess of expected future demand.

The estimate of excess quantities is subjective and primarily dependent on our estimates of future demand.

If our estimate of future demand changes, we consider the impact on the reserve for excess inventory and adjust the reserve as required.

Increases in the reserve are recorded as charges in cost of product sales.

We capitalize inventory costs associated with our products prior to regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized;

Inventory reserves are recorded as a component of cost of product sales in our consolidated statement of operations.

We may capitalize inventory costs associated with our products prior to regulatory approval when future commercialization is probable.

otherwise, such costs are expensed as research and development.

The determination to capitalize inventory costs is based on various factors, including status and expectations of the regulatory approval process, any known safety or efficacy concerns, potential labeling restrictions, and any other impediments to obtaining regulatory approval.

We did not capitalize preapproval inventory during 2019.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization.

Property and equipment are stated at cost less accumulated depreciation.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and ten years .

Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease.

The Company’s leasehold improvements primarily relate to its new corporate headquarters in Plymouth Meeting, PA, and are generally being amortized through the end of the lease term in May 2024.

Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease.

The Company’s leasehold improvements primarily relate to its corporate headquarters in Plymouth Meeting, PA, and are generally being depreciated through the end of the lease term in May 2024.

When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statement of operations and comprehensive loss in the period realized.

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Revenue Recognition

Effective January 1, 2019, the Company adopted ASC 606, Revenue from Contracts with Customers (ASC 606).

This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

We account for contracts with our customers in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), or ASC 606.

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

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and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determine those that are performance obligations.

The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company has determined that the delivery of its product to its customer constitutes a single performance obligation as there are no other promises to deliver goods or services.

Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.

The Company has assessed the existence of a significant financing component in the agreements with its customers.

The trade payment terms with its customers do not exceed one year and therefore, no amount of consideration has been allocated as a financing component.

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services it transfers to the customer.

The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period.

Our analyses contemplate the application of the constraint in accordance with ASC 606.

Actual amounts of consideration

ultimately received may differ from our estimates.

If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

We have determined that the delivery of our product to our customer constitutes a single performance obligation as there are no other promises to deliver goods or services in contracts with our customers.

Shipping and handling activities are considered to be fulfilment activities and are not considered to be a separate performance obligation.

The payment terms with our customers do not exceed one year and therefore, no amount of consideration has been allocated as a financing component.

Taxes collected related to product sales are remitted to governmental authorities and are excluded from revenue.

Product Sales, Net

The Company began commercial sales of WAKIX in November 2019.

The Company sells WAKIX to its customers (a limited number of specialty distributors) that, in turn, distribute WAKIX to patients.

The Company recognizes revenue on sales of WAKIX when the customer obtains control of the product, which occurs at a point in time, typically upon delivery.

Product revenues are recorded at the product’s wholesale acquisition costs, net of applicable reserves for variable consideration that are offered within contracts between the Company and its customers, payors, and other indirect customers relating to the sale of WAKIX.

Components of variable consideration include government and commercial contracts, product returns, commercial co-payment assistance program transactions, and distribution services fees.

These deductions are based on the amounts earned or to be claimed on the related sales and are classified as a current liability or reduction of receivables, based on expected value method and a range of outcomes and are probability weighted in accordance with ASC 606.

The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognition under contracts will not occur in a future period.

The Company’s analyses contemplate the application of the constraint in accordance with ASC 606.

Actual amounts of consideration ultimately received may differ from its estimates.

If actual results in the future vary from its estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

We recognize revenue on sales of WAKIX when the customer obtains control of the product, which occurs at a point in time, typically upon delivery.

Product revenues are recorded at the product’s list price, net of applicable reserves for variable consideration that are offered within contracts between us and our customers, payors, and other indirect customers relating to the sale of WAKIX.

Components of variable consideration include government and commercial contracts, product returns, commercial co-payment assistance program transactions, and distribution service fees.

These deductions, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as a current liability or reduction of receivables.

Cost of Product Sold

Cost of product sold includes manufacturing and distribution costs, the cost of drug substance, FDA program fees, royalties due to third parties on net product sales, freight, shipping, handling, storage costs, and salaries of employees involved with production.

The Company began capitalizing inventory upon FDA approval of WAKIX with a portion of the inventory sold during the year ended December 31, 2020 produced prior to FDA approval and, therefore, was previously expensed as research and development expense in 2019 in the amount of $1,323.

Excluded from cost of product sold shown and included in general and administrative on the

consolidated statements of operations and comprehensive loss is amortization of acquired developed technology of $9,843 and $2,815 for the years ended December 31, 2020 and 2019, respectively.

The Company began capitalizing inventory upon FDA approval of WAKIX.

A portion of the inventory sold during the year ended December 31, 2020 was produced prior to FDA approval and, therefore, $ 1,323 was expensed as research and development expense during the year ended December 31, 2019.

Research and Development Expenses

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We expensed the costs of advertising, including promotional expenses, as incurred.

Advertising expense was $13,301 and $7,072 a for the years ended December 31, 2020 and 2019, respectively.

Advertising expenses were $ 19,558 , $ 13,301 and $ 7,072 for the years ended December 31, 2021, 2020 and 2019, respectively.

Stock-Based Compensation

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On November 15, 2019 the Company modified the award to remove the performance condition resulting in $ 8,400 of noncash expense that is included in the Company’s consolidated results of operations for the year ended December 31, 2019 (see Note 13 for further details).

Basic and Diluted Net Loss per Share

Basic net loss per share is determined using the weighted average number of shares of common stock outstanding during each period.

Basic and Diluted Net Income (Loss) per Share

Basic net income (loss) per share is determined using the weighted average number of shares of common stock outstanding during each period.

Diluted net income per share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible preferred stock and stock options, which would result in the issuance of incremental shares of common stock.

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Changes in recognition or measurement are reflected in the period in which a change in judgment occurs.

At December 31, 2020 and 2019, the Company did not have any unrecognized uncertain tax positions.

At December 31, 2021 and 2020, the Company did no t have any unrecognized uncertain tax positions.

The Company’s policy is to include any interest and penalties as a component of income tax expense.

Agreement Related to Intellectual Property

In August 2021, The Company entered into an asset purchase agreement with ConSynance Therapeutics, Inc.

to acquire HBS-102 (formerly referred to as “CSTI-100”), a potential first-in-class molecule with a novel mechanism of action.

Under the terms of the agreement, the Company acquired full development and commercialization rights globally, with the exception of Greater China, for $ 3,500 .

The Company accounted for the transaction as an asset acquisition as substantially all of the fair value of the assets acquired was concentrated in a single identified asset.

The payment was recorded in research and development within the consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2021.

Additionally, there are payments due upon the achievement of certain milestones including $ 1,750 for preclinical milestones, $ 19,000 for development milestones, $ 44,000 for regulatory milestones and $ 110,000 for sales milestones.

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act).

For the years ended December 31, 2020 and 2019, the Company was an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act).

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act.

The Company had previously elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act.

As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

The Company is no longer an emerging growth company as of December 31, 2021, and is no longer able to take advantage of the reduced disclosure requirements applicable to emerging growth companies.

As a result, the Company has adopted several recently issued accounting pronouncements on December 31, 2021 and to reflect the adoption as of January 1, 2021 in our annual results for the period ended December 31, 2021 (see below).

Recently Issued Accounting Pronouncements

ASU 2016-02 Leases (Topic 842).

In February 2016, the FASB issued amended guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities in the balance sheet and disclosing key information about leasing arrangements.

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For operating leases, a lessee should recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.

For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities.

The new standard will become effective for the Company’s fiscal year ending December 31, 2022.

The Company is currently assessing the impact of this amended guidance and the timing of adoption.

As the Company is no longer an emerging growth company as of December 31, 2021, the Company adopted this standard on a modified retrospective basis on December 31, 2021 and reflected the adoption as of January 1, 2021 in our annual results for the period ended December 31, 2021.

The Company elected the package of practical expedients permitted under the transition guidance, which allows it to carry forward its historical lease classification, its determination regarding whether a contract contains a lease and any initial indirect costs that had existed prior to the adoption of this new standard.

The Company also elected not to recognize lease assets and lease liabilities for leases with a term of 12 months or less.

The Company recognized $ 1,958 of operating lease right-of-use assets, $ 991 in short-term operating lease liabilities and $ 1,417 of long-term operating lease liabilities on the consolidated balance sheet upon adoption of the new standard.

The operating lease liabilities were determined based on the present value of the remaining minimum rental payments and the operating lease right-of-use asset was determined based on the value of the lease liabilities, adjusted for deferred rent and tenant allowance balances of $ 450 , which were previously included in accrued liabilities and other long-term liabilities.

ASU 2016-13 Financial Instruments – Credit Losses (Topic 326).

In June 2016, the FASB issued ASU No.

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2016-13 introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities.

The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 for companies deemed to be small reporting companies as of November 15, 2019, with early adoption permitted.

The Company is currently evaluating the potential impact of adoption of this standard on its results of operations, financial position and cash flows and related disclosures.

ASU 2019-12, Income Taxes (Topic 740 ).

In December 2019, the FASB issued ASU No.

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Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes by removing certain exceptions to the general principles in the existing guidance for income taxes and making other minor improvements.

The amendments are effective for annual reporting periods beginning after December 15, 2020 with early adoption permitted.

The Company is currently evaluating the impact of adopting this new accounting guidance.

As the Company is no longer an emerging growth company as of December 31, 2021, the Company adopted this standard on December 31, 2021 and reflected the adoption as of January 1, 2021 in our annual results for the period ended December 31, 2021, which did not have a significant impact to its consolidated financial statements.

ASU 2020-04, Reference Rate Reform (Topic 848) .

In March 2020, the FASB issued ASU No.

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The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022.

We are currently evaluating the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact to our consolidated financial statements.

The Company is currently evaluating the impact of the transition from LIBOR to alternative reference rates but does not expect a significant impact to its consolidated financial statements.

Inventory, net consisted of the following:

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Inventory, gross

Reserve for obsolescence

Reserve for excess inventory

Total inventory, net

INTANGIBLE ASSET

On August 15, 2019, the Company received FDA approval of WAKIX ® (pitolisant) for the treatment of excessive daytime sleepiness (“EDS”) in adult patients with narcolepsy.

This event triggered a milestone payment of $75,000 associated with the License Agreement which the Company capitalized as an intangible asset and paid in November of 2019.

The Company determined a useful life of 10 years for such intangible asset, and, as of December 31, 2020 the remaining useful life was 9 years.

Prior to this event, all other milestones associated with the License Agreement were expensed through research and development as they did not meet the criteria to be recognized as an intangible asset.

On October 13, 2020, the Company received notice that the FDA approved the NDA for WAKIX ® for the treatment of cataplexy in adult patients with narcolepsy.

This event triggered a milestone payment of $100,000 associated with the License Agreement which the Company capitalized as an intangible asset and paid in January of 2021.

The Company determined a useful life of 9 years for such intangible asset, and, as of December 31, 2020 the remaining useful life was 9 years.

In August 2019, the Company received FDA approval of WAKIX ® (pitolisant) for the treatment of excessive daytime sleepiness (“EDS”) in adult patients with narcolepsy.

This event triggered a milestone payment of $ 75,000 under the provisions of the License Agreement which the Company capitalized as an intangible asset.

The Company determined a useful life of 10 years for this intangible asset, and, as of December 31, 2021 the remaining useful life was 7.8 years.

In October 2020, the Company received FDA upon approval for the NDA for WAKIX ® for the treatment of cataplexy in adult patients with narcolepsy.

This event triggered a milestone payment of $ 100,000 under the provisions of the License Agreement which the Company capitalized as an intangible asset and paid in January of 2021.

The Company determined a useful life of 9 years for this intangible asset, and, as of December 31, 2021 the remaining useful life was 7.8 years.

Amortization expense was $ 18,424 , $ 9,843 and $ 2,815 for the years ended December 31, 2021, 2020 and 2019, respectively, and is recorded in general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).

The Company expects the future annual amortization expense for the unamortized intangible assets to be as follows:

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LICENSE AGREEMENT

On July 28, 2017, Harmony entered into the License Agreement whereby Harmony acquired the exclusive right to commercialize the pharmaceutical compound pitolisant for the treatment, and/or prevention, of narcolepsy, obstructive sleep apnea, idiopathic hypersomnia, and Parkinson’s disease as well as any other indications unanimously agreed by the parties in the United States and its territories.

A milestone payment of $50,000 was due upon acceptance by the FDA of pitolisant’s New Drug Application (“NDA”), which was achieved on February 12, 2019 and was expensed within research and development for the year ended December 31, 2019.

A milestone payment of $77,000, including a $2,000 fee, was due upon FDA approval of WAKIX ® (pitolisant) for treatment of EDS in adult patients with narcolepsy, which was achieved on August 14, 2019.

The $2,000 payment and $75,000 milestone payment were paid in August and November 2019, respectively.

In addition, a payment of $2,000 is due upon the FDA approval of the NDA for WAKIX ® for the treatment of cataplexy in adult patients with narcolepsy (the “Trigger Date”) which was paid in October 2020 and a $100,000 milestone payment which was paid in January 2021.

An additional $40,000 milestone payment is due to Bioprojet upon WAKIX attaining $500,000 in aggregate net sales in the United States.

The License Agreement also requires sales-based milestone payments, a fixed trademark royalty and a tiered royalty, all based on net sales, which become due and payable to Bioprojet on a quarterly basis.

During the year ended December 31, 2020, the Company incurred $25,580 for sales-based, trademark and tiered royalties recognized as cost of product sold.

In July , 2017, Harmony entered into the License Agreement (“the License Agreement”) with Bioprojet Société Civile de Recherche (“Bioprojet”) whereby Harmony acquired the exclusive right to commercialize the pharmaceutical compound pitolisant for the treatment, and/or prevention, of narcolepsy, obstructive sleep apnea, idiopathic hypersomnia, and Parkinson’s disease as well as any other indications unanimously agreed by the parties in the United States and its territories.

A milestone payment of $ 50,000 was due upon acceptance by the FDA of pitolisant’s NDA, which was achieved on February 12, 2019 and was expensed within research and development for the year ended December 31, 2019.

A milestone payment of $ 77,000 , which included a $ 2,000 fee that is described below, became due upon FDA approval of WAKIX (pitolisant) for treatment of EDS in adult patients with narcolepsy in August 2019.

In addition, a milestone payment of $ 102,000 , which included a $ 2,000 fee became due upon the FDA approval of the NDA for WAKIX for the treatment of cataplexy in adult patients with narcolepsy.

The $ 2,000 payment was paid in October 2020 and a $ 100,000 milestone payment was paid in January 2021.

An additional $ 40,000 milestone payment is due to Bioprojet upon WAKIX attaining $ 500,000 in aggregate net sales in the United States (see Note 20 for further information on milestone payment).

The License Agreement also requires a fixed trademark royalty and a tiered royalty payment, all based on net sales, which are payable to Bioprojet on a quarterly basis.

During the years ended December 31, 2021, 2020 and 2019, the Company incurred $ 50,957 , $ 25,580 and 938 , respectively, for sales-based, trademark and tiered royalties recognized as cost of product sold.

As of December 31, 2021 and 2020, the Company had accrued $ 16,396 and $ 9,006 , respectively, for sales-based, trademark and tiered royalties.

At December 31, 2020 the Company had accrued $100,000 for the milestone payment to Bioprojet.

The Company had $ 0 and $ 100,000 accrued for milestone payments to Bioprojet as of December 31, 2021 and 2020, respectively.

ACCRUED EXPENSES

Accrued expenses consist of the following:

Milestone payment

Royalties due to third parties

Rebates and other sales deductions

Research and development

Selling and marketing

Research and development

Professional fees, consulting, and other services

Debt issuance costs

Other expenses

Milestone payment

Credit Agreements

On February 28, 2019, the Company entered into a multi-draw loan agreement with CRG Servicing LLC for an aggregate of $200,000 (the “CRG Loan”), which matured in March 2025.

The Loan bore a fixed rate of 12%.

The Loan agreement required compliance with certain financial covenants.

The Company could draw three tranches of the Loan based on achieving specific milestones and dates.

The Company could elect to pay the interest on the outstanding principal amount as follows:

(i) only 7.5% of the 12% per annum in cash, paid quarterly, starting in March 2019, and (ii) 4.5% of the 12% per annum interest as compounded interest, added to

the aggregate outstanding principal balance quarterly;

the amount of any such compounded interest being a paid-in-kind loan.

As of December 31, 2019, the Company had borrowed $100,000, resulting in cash proceeds received of $94,816, net of issuance costs.

The issuance costs of $5,184 were being amortized over the six-year loan term of the CRG Loan.

Unamortized debt issuance costs as of December 31, 2019 are $4,592 and are presented in the consolidated balance sheets as a direct deduction from the carrying value of the debt.

On January 9, 2020 the Company entered into a credit agreement with OrbiMed Royalty & Credit Opportunities, LP for an aggregate amount of $200,000 (the “OrbiMed Loan”), which matures in January 2026.

Blackstone Credit Agreement

In August 2021, the Company entered into the Blackstone Credit Agreement that provides for (i) a senior secured term loan facility in an aggregate original principal amount of $ 200,000 (the “Initial Term Loan”) and (ii) a senior secured

delayed draw term loan facility in an aggregate principal amount up to $ 100,000 (the “DDTL” and, together with the Initial Term Loan, the “Loans”).

The DDTL will be available to draw down through August 9, 2022.

The repayment schedule for the Initial Term Loan consists of quarterly $ 500 principal payments commencing on December 31, 2021 and increasing to quarterly $ 5,000 principal payments beginning on March 31, 2024, with a $ 145,500 payment due on the maturity date of August 9, 2026 (“Maturity Date”).

Interest is payable quarterly, which commenced on November 9, 2021 and continuing through the Maturity Date.

The Initial Loan bears interest at a per annum rate equal to LIBOR, subject to a 1.00 % floor, plus 6.50 %.

The net cash received related to the Initial Term Loan as a result of the transaction, less debt issuance costs of $ 8,151 , was $ 191,849 .

The debt issuance costs related to the Initial Term Loan will be amortized as additional interest expense over the five-year loan term of the Blackstone Credit Agreement.

In addition, the Company paid $ 1,000 in debt issuance costs relating the DDTL, which are recorded in other current assets within the consolidated balance sheet.

The fair value of the Initial Term Loan as of December 31, 2021 was $ 185,389 .

OrbiMed Credit Agreement

In January 2020, the Company entered into a credit agreement with OrbiMed for an aggregate amount of $ 200,000 (the “OrbiMed Loan”), with a maturity date of January 2026.

Borrowings under the OrbiMed Loan are collateralized by all of the Company’s assets, excluding the intellectual property licensed through the License Agreement.

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At the time of prepayment or repayment of all or any portion of the principal of the OrbiMed Loan, the Company is required to pay an exit fee of 7.0 % of the principal amount of the OrbiMed Loan prepaid, repaid, or required to be prepaid or repaid.

The Company recorded as a liability and debt discount the exit fee at the origination of the term loan.

In addition to entering into the OrbiMed Loan, the Company extinguished the CRG Loan which required a payoff amount of $120,893 consisting of principal repayment, interest, and exit fees.

In connection with extinguishment of the CRG Loan, we recognized a loss on extinguishment of $22,639, which included an exit fee of $18,047 and the write-off of the remaining unamortized debt issuance costs of $4,592.

The loss on extinguishment of debt was recorded in loss on debt extinguishment within the Company’s consolidated statements of operations.

The net cash received as a result of the transaction, less debt issuance costs of $5,804, was $73,313.

These debt issuance costs will be amortized as additional interest expense over the six-year loan term of the OrbiMed Loan.

The fair value of the OrbiMed loan as of December 31, 2020 was $245,700.

In connection with the OrbiMed Loan, the Company issued warrants (the “Warrants”) to OrbiMed Royalty & Credit Opportunities, LP on January 9, 2020.

See Note 13 for further discussion of the Warrants.

Pursuant to the Warrants, OrbiMed Royalty & Credit Opportunities, LP, may purchase up to 410,239 shares of the Company’s Common Stock for an initial exercise price of $16.10 at any time from the date of execution of the Warrants through the expiration date, defined within the Warrants as the earlier of (i) January 9, 2027 and (ii) the closing date of a Corporate Reorganization.

The fair value of the Warrants using the Black-Scholes option-pricing model was $2,359 at January 9, 2020.

The portion of the OrbiMed Loan proceeds allocated to the warrant liability resulted in a debt discount, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the debt and is being amortized as additional interest expense over the six-year loan term of the OrbiMed Loan.

The unamortized debt discount as of December 31, 2020 is $2,097 and is presented in the consolidated balance sheets as a direct deduction from the carrying value of the debt.

The balances of the OrbiMed Loan as of December 31, 2020 and the CRG Loan as of December 31, 2019 were as follows:

The Company recorded the exit fee as a liability and debt discount at the origination of the term loan.

In connection with the OrbiMed Loan, the Company extinguished its $ 200,000 multi-draw loan agreement with CRG Servicing LLC (the “CRG Loan”), which required a payoff amount of $ 120,893 consisting of principal repayment, interest, and exit fees.

In connection with extinguishment of the CRG Loan, the Company recognized a loss on extinguishment of $ 22,639 within the Company’s consolidated statements of operations for the nine months ended September 30, 2020.

In connection with the Blackstone Credit Agreement, the Company extinguished the OrbiMed Loan, which required a payoff amount of $ 222,666 consisting of principal repayment, interest, exit fees and a prepayment premium.

The Company recognized a loss on extinguishment of $ 26,146 relating to the OrbiMed Loan within the Company’s consolidated statements of operation for the year ended December 31, 2021.

Long-term debt, net consists of the following:

Liability component - principal

Unamortized debt discount associated with the exit fee, debt financing costs and discount with warrant financing

Unamortized debt discount associated with the exit fee, debt financing costs and discount with warrant financing (see note 14)

Liability component - net carrying value

Interest expense related to the OrbiMed Loan and CRG Loan were included in interest expense, net in the Consolidated Statements of Operations as follows:

Less current portion

Long term debt, net

Future minimum payments relating to long term debt, net as of December 31, 2021 for the periods indicated below consists of the following:

Years ending December 31,

Interest expense related to the Company’s long term debt, net, which is included in interest expense, net in the consolidated statements of operations and comprehensive income (loss), consists of the following:

Year Ended December 31,

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Total term loan interest expense

COMMITMENTS AND CONTINGENCIES

From time to time, the Company is subject to claims and suits arising in the ordinary course of business.

The Company accrues such liabilities when they are known, if they are deemed probable and can be reasonably estimated.

During 2019 the Company was involved in ongoing litigation with its former chief executive officer related to arbitration and the value of vested common shares.

On October 24, 2019, the Company reached a settlement resulting in $3,466 of general and administrative expense reflected in the Company’s consolidated results of operations for the year ended December 31, 2019.

Lease Agreements

In April 2018, the Company entered into an operating lease for approximately nine thousand square feet of office space in Northbrook, IL, which expired in January 2020.

In June 2018, the Company entered into an operating lease for approximately fifteen thousand square feet of office space in Plymouth Meeting, PA, which expires in May 2024.

In December 2020, the Company entered into an operating lease for approximately thirteen thousand square feet of additional office space in Plymouth Meeting, PA, which expires in May 2024.

The term will not commence until the Company takes occupancy in mid-2021.

The terms of the lease payments provide for rental payments on a monthly basis and on a graduated scale.

The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid.

In addition, tenant improvement allowances recorded are amortized as a reduction to rent expense on a straight-line basis over the lease term.

Rent expense was $686 for the year ended December 31, 2020, compared to $1,051 for the year ended December 31, 2019.

The following table sets forth the lease payment obligations as of December 31, 2020, for the periods indicated below:

The Company also leases a fleet of automobiles which are used by its sales representatives and are classified as operating leases.

Effective with the adoption of ASC 842 on January 1, 2021, operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate.

Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Our leases have remaining lease terms of less than 1 year to 3 years , some of which may include the option to extend or terminate the leases.

The company recorded operating lease costs of $ 1,197 for the year ended December 31, 2021 and recorded rent expense of $ 686 and $ 1,051 for the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2021, the weighted-average remaining lease term for operating leases was 2.5 years and the weighted-average discount rate for operating leases was 3.8 %.

Supplemental balance sheet information related to operating leases was as follows:

Classification

December 31, 2021

Operating lease right-of-use assets

Other noncurrent assets

Operating lease liability, current portion

Other current liabilities

Operating lease liability, long-term

Other long-term liabilities

Total operating lease liabilities

Supplemental cash flow information related to operating leases was as follows:

December 31, 2021

Operating cash flows from operating leases

Right of use assets obtained in exchange for operating lease obligations (1)

(1) Including the balance recognized on January 1, 2021, upon adoption of ASU No.

Future payments under noncancelable operating leases with initial terms of one year or more as of December 31, 2021 consisted of the following:

Years ending December 31,

Total lease payments

imputed interest

Total lease liabilities

COMMITMENTS AND CONTINGENCIES

From time to time, the Company is subject to claims and suits arising in the ordinary course of business.

The Company accrues such liabilities when they are known, if they are deemed probable and can be reasonably estimated.

During 2019 the Company was involved in litigation with its former chief executive officer related to arbitration and the value of vested common shares.

In October 2019, the Company reached a settlement resulting in a charge of $ 3,466 , which was included in general and administrative expense in the Company’s consolidated results of operations for the year ended December 31, 2019.

CONVERTIBLE PREFERRED STOCK

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Series A Preferred Stock

On September 22, 2017, the Company issued 270,000,000 shares of Series A convertible preferred stock for a purchase price of $1.00 per share, or $270,000 in the aggregate.

In September 2017, the Company issued 270,000,000 shares of Series A convertible preferred stock for a purchase price of $ 1.00 per share, or $ 270,000 in the aggregate.

On January 8, 2018, the Company issued an additional 15,000,000 shares of Series A convertible preferred stock for a purchase price of $ 1.00 per share, or $ 15,000 in the aggregate.

As of December 31, 2019, there were 286,000,000 Series A convertible preferred stock authorized of which 285,000,000 were issued and outstanding.

Each outstanding share of Series A convertible preferred stock accrued dividends at 10 % per annum of the Series A original issue price, subject to adjustment for stock splits, combinations, recapitalizations, stock dividends and similar transactions.

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Series B Preferred Stock

On January 8, 2018, the Company issued 8,000,000 shares of Series B convertible preferred stock for a purchase price of $1.25 per share, or $10,000 in the aggregate.

As of December 31, 2019, there were 8,030,000 shares of Series B convertible preferred stock authorized, of which 8,000,000 were issued and outstanding.

Each outstanding share of Series B convertible preferred stock accrued dividends at 10% per annum of the Series B original issue price, subject to adjustment for stock splits, combinations, recapitalizations, stock dividends and similar transactions.

In January 2018, the Company issued 8,000,000 shares of Series B convertible preferred stock for a purchase price of $ 1.25 per share, or $ 10,000 in the aggregate.

Each outstanding share of Series B convertible preferred stock accrued dividends at 10 % per annum of the Series B original issue price, subject to adjustment for stock splits, combinations,

recapitalizations, stock dividends and similar transactions.

Preferred dividends on the Series B convertible preferred stock were cumulative and were compounded annually.

Series C Preferred Stock

On August 9, 2019, the Company issued 25,510,205 shares of Series C convertible preferred stock for a purchase price of $1.96 per share, or $50,000 in the aggregate.

As December 31, 2019, there were 25,600,000 shares of Series C convertible preferred stock authorized, of which 25,510,205 were issued and outstanding.

In August 2019, the Company issued 25,510,205 shares of Series C convertible preferred stock for a purchase price of $ 1.96 per share, or $ 50,000 in the aggregate.

Each outstanding share of Series C convertible preferred stock accrued dividends at 10 % per annum of the Series C original issue price, subject to adjustment for stock splits, combinations, recapitalizations, stock dividends and similar transactions.

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STOCKHOLDERS’ EQUITY (DEFICIT)

On August 11, 2020, the Company implemented a 1-for-8.215 reverse stock split of the Company’s common stock.

In August 2020, the Company implemented a 1-for-8.215 reverse stock split of the Company’s common stock.

All share and per share data shown in the accompanying financial statements and related notes have been retroactively revised to reflect the reverse stock split with the exception of the preferred stock.

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Shares of common stock reserved for issuance upon the conversion of the Company’s Preferred Stock were proportionately reduced.

As of August 11, 2020, all outstanding shares of preferred stock and preferred stock dividend were convertible into shares of common stock on a 1-for-8.215 basis.

On August 21, 2020, the Company completed its IPO of common stock, in which it sold 6,151,162 shares, including 802,325 shares pursuant to the underwriters’ over-allotment option.

The shares began trading on the Nasdaq Global Market on August 19, 2020.

In August 2020, the Company completed its IPO of common stock, in which it sold 6,151,162 shares, including 802,325 shares pursuant to the underwriters’ over-allotment option.

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The Company’s common stock has no preemptive rights, conversion rights or other subscription rights or redemption or sinking fund provisions.

1,217,285 common shares held by an investor were subject to certain forfeiture provisions that are dependent upon the outcome of certain future events.

On November 15, 2019, the Company removed the

provision associated with this forfeiture resulting in $8,400 of noncash stock compensation expense reflected in the Company’s consolidated results of operations for the year ended December 31, 2019.

In connection with the Blackstone Credit Agreement, in August 2021, the Company sold an aggregate of 1,048,951 shares of our common stock, par value $ 0.00001 per share, for an aggregate cash consideration of $ 30,000 , or $ 28.60 per share.

This sale did not involve a public offering and was therefore exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder as a transaction not involving any public offering.

In September 2021, the Company issued 221,511 shares of common stock in connection with the OrbiMed warrant (see Note 14).

In November 2019, the Company removed certain forfeiture provisions associated with 1,217,285 common shares held by an investor resulting in $ 8,400 of noncash stock compensation expense reflected in the Company’s consolidated results of operations for the year ended December 31, 2019.

STOCK INCENTIVE PLAN AND STOCK-BASED COMPENSATION

2020 Stock Incentive Plan

On August 7, 2017, the Company adopted an equity incentive plan (the “2017 Plan”).

Under the 2017 Plan, directors, officers, employees, consultants, and advisors of the Company can be paid incentive compensation measured by the value of the Company’s common shares through grants of stock options, stock appreciation rights, or restricted stock.

In connection with the Company’s IPO, the board of directors adopted, and its stockholders approved, the 2020 Incentive Award Plan (the “2020 Plan”), in order to facilitate the grant of cash and equity incentives to directors, employees (including the Company’s named executive officers) and consultants of the Company and its subsidiaries.

The 2020 Plan provides for the grant of stock options, including incentive stock options (“ISOs”) and non-qualified stock options (“NSOs”), SARs, restricted stock, dividend equivalents, restricted stock units (“RSUs”) and other stock or cash-based awards.

Stock options and stock appreciation rights under the 2017 Plan and the 2020 Plan have a 10-year contractual term and vest over the vesting period specified in the applicable award agreement, at achievement of a performance requirement, or upon change of control (as defined in the applicable plan).

RSUs vest over the vesting period specified in the applicable award agreement, at achievement of a performance requirement, or upon change of control (as defined in the applicable plan).

As of December 31, 2021, there were 4,113,432 shares of common stock reserved for issuance under the 2020 Plan.

The number of shares that may be issued under the 2020 Plan will automatically increase on January 1 of each year in an amount equal to the lesser of (i) 4.0 % of the shares of the Company’s common stock outstanding on December 31 of the preceding year or (ii) an amount determined by the Company’s board of directors.

2017 Stock Incentive Plan

In August 2017, the Company adopted an equity incentive plan (the “2017 Plan”).

Upon the effectiveness of the 2020 Plan, no further grants will be made under the 2017 Plan.

However, the 2017 Plan will continue to govern the terms and conditions of outstanding awards granted under it.

The 2020 Plan provides for the grant of stock options, including ISOs and NSOs, SARs, restricted stock, dividend equivalents, RSUs and other stock or cash based awards.

Stock options under the 2017 Plan and the 2020 Plan have a 10-year contractual term and vest over the vesting period specified in the applicable award agreement, at achievement of a performance requirement, or upon change of control (as defined in the applicable plan).

Changes in awards granted under the Plan as of December 31, 2020 and 2019, are as follows:

However, the 2017 Plan will continue to govern the terms and conditions of outstanding awards granted under under the 2017 Plan.

Stock Options

The following table summarizes stock option activity for the year ended December 31, 2021:

Awards outstanding—December 31, 2020

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Awards outstanding—December 31, 2021

Stock Appreciation Rights

The following table summarizes SARs activity for the year ended December 31, 2021:

Awards outstanding—December 31, 2020

Awards issued

Awards exercised

Awards forfeited

Awards outstanding—December 31, 2021

Restricted Stock Units

The following table summarizes RSU activity for the year ended December 31, 2021:

Awards outstanding—December 31, 2020

Awards issued

Awards exercised

Awards forfeited

Awards outstanding—December 31, 2021

As of December 31, 2021 and 2020, stock awards issued under the 2017 and 2020 Plans of 1,285,432 and 987,538 common shares, respectively, were vested.

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As a result of the adoption, for the year ended December 31, 2021 and 2020, respectively, the Company reversed $ 278 and $ 3 out of stock-based compensation previously recorded.

Value of Stock Options

The Company has valued awards for each of the plans included herein using the Black-Scholes option-pricing model.

The Company historically has been a private company and lacks company-specific historical and implied volatility information.

Therefore, the Company estimates its expected stock volatility based on historical volatility of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price.

For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options.

Value of Stock Options and SARs

The Company values awards using the Black-Scholes option-pricing model.

The Company estimates its expected stock volatility based on historical volatility of a peer group of companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price.

The Company utilizes the “simplified” method to estimate the expected term for option awards that qualify as “plain-vanilla” options.

The expected term for SARs granted is estimated based upon the weighting of certain future events.

The risk-free interest rate is determined by reference to the U.S.

Treasury yield curve in effect at the time of grant of the award for the time periods approximately equal to the expected term of the award.

Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

Expected dividend yield is zero based upon the fact that the Company has never paid cash dividends and does not intent to do so for the foreseeable future.

The assumptions used to value the awards are summarized in the following table.

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Expected term (years)

Value of RSUs

The fair value of RSUs is equal to the value of the Company’s common stock on the grant date.

The weighted average per share fair value of awards issued under the Plan was $ 12.82 , $ 10.06 and $ 3.45 in 2021, 2020 and 2019, respectively.

Stock-based compensation expense was $5,190 and $9,909 for the years ended December 31, 2020 and 2019, respectively, and was recorded in the consolidated statements of operations and comprehensive loss in the following line items:

Stock-Based Compensation Expense

Stock-based compensation expense was $ 16,105 , $ 5,190 and $ 9,909 for the years ended December 31, 2021, 2020 and 2019, respectively, and was recorded in the consolidated statements of operations and comprehensive income (loss) in the following line items:

Year Ended December 31,

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Stock appreciation rights are reflected as other non-current liability.

The Company will recognize compensation expense for these awards as summarized in the following table.

Years Ending December 31,

As of December 31, 2021, the total

unrecognized stock-based compensation expense related to Options and RSUs was $ 56,531 .

Such amount will be recognized in the Company’s consolidated statement of operations over a weighted average period of 3.4 years.

Employee Stock Purchase Plan

The 2021 Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board of Directors on April 30, 2021.

The ESPP permits eligible employees to purchase shares of the Company’s common stock at a 15 % discount from the lesser of the fair market value per share of the Company’s common stock on the first day of the offering period or the fair market value of the Company’s common stock on the purchase date.

Funds are collected from employees through after-tax payroll deductions.

The total number of shares reserved for issuance under the ESPP was initially 629,805 , which will automatically increase on January 1 of each year in an amount equal to the lesser of (i) 1.0 % of the shares of the Company’s common stock outstanding on December 31 of the preceding year or (ii) an amount determined by the Company’s board of directors.

It is intended that the ESPP meet the requirements for an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

For the year ended December 31, 2021, there were 11,010 shares issued under the ESPP.

The discount on the ESPP for the year ended December 31, 2021 was $ 173 , and is recorded within stock-based compensation expense.

In connection with the OrbiMed Loan, the Company issued Warrants to OrbiMed Royalty & Credit Opportunities, LP on January 9, 2020.

Pursuant to the Warrants, OrbiMed Royalty & Credit Opportunities, LP, may purchase up to 410,239 shares of the Company’s Common Stock for an initial exercise price of $ 16.10 at any time from the date of execution of the Warrants through the expiration date, defined within the Warrants as the earlier of (i) January 9, 2027 and (ii) the closing date of a Corporate Reorganization.

The fair value of the

Warrants using the Black-Scholes option-pricing model was $2,359 on January 9, 2020 and was initially recorded as a warrant liability which was included in warrant liability in the consolidated balance sheet.

The fair value of the Warrants using the Black-Scholes option-pricing model was $ 2,359 on January 9, 2020 and was initially recorded as a warrant liability which was included in warrant liability in the consolidated balance sheet.

The unamortized debt discount as of December 31, 2020 is $ 2 , 102 and is presented in the consolidated balance sheet as a direct deduction from the carrying value of the debt.

During the year ended December 31, 2020, a loss of $3,109 was recorded in other expense in the consolidated statements of operations due to the change in the fair value of the warrant liability.

See footnote 1 6 for the fair value of the Warrants.

In connection with the Blackstone Credit Agreement, the OrbiMed Loan was repaid in fully and the unamortized debt discount related to the Warrants was included in the loss on debt extinguishment (see Note 12).

On September 3, 2021, OrbiMed exercised its option to purchase shares of the Company’s common stock pursuant to the Warrants, which resulted in the net settlement of 221,511 shares of the Company’s common stock issued to OrbiMed.

In connection with the IPO, the financial instrument underlying the warrants was converted from the Company’s Series C Preferred Stock to the Company’s Common Stock.

As a result of this conversion the Warrants were re-evaluated under ASC 480 Distinguishing Liabilities from Equity and ASC 815 Derivatives and Hedging and reclassified to equity.

A summary of the changes in the warrant liability for the year ended December 31, 2020 is as follows:

Balance, beginning of period

Fair Value at Issuance

Change in fair value included in the statement of operations

Reclassification to equity

Balance, end of period

EARNINGS PER SHARE

The Company has reported net income for the year ended December 31, 2021.

Diluted net income per common share is computed under the treasury stock method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options, stock appreciation rights, restricted stock units and warrants.

In addition, the Company analyzes the potential dilutive effects of the outstanding convertible preferred stock under the ‘if-converted’ method when calculating diluted earnings per share, in which it is assumed that the outstanding convertible preferred stock converts into common stock at the beginning of the period or when issued if later.

The Company reports the more dilutive of the approaches (treasury stock or ‘if converted’) as its diluted net income per share during the period.

For the years ended December 31, 2020 and 2019, the Company used the two-class method to compute net loss per common share because the Company has issued securities (convertible preferred stock) that entitle the holder to participate in dividends and earnings of the Company.

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The remaining earnings (undistributed earnings) are allocated to common stock and each series of convertible preferred stock to the extent that each preferred security may share in the earnings as if all of the earnings for the period had been distributed.

The total earnings allocated to common stock is then divided by the number of outstanding shares to which the earnings are allocated to determine the earnings per share.

earnings allocated to common stock is then divided by the number of outstanding shares to which the earnings are allocated to determine the earnings per share.

The two-class method is not applicable during periods with a net loss, as the holders of the convertible preferred stock have no obligation to fund losses.

Diluted net loss per common share is computed under the treasury stock method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants.

The Company reports the more dilutive of the approaches (treasury stock or ‘if converted’) as their diluted net income per share during the period.

The Company has reported a net loss for the years ended Dec ember 3 1 , 2020 and 2019, and the weighted average number of shares utilized for basic and diluted net loss per share attributable to common stockholders are the same for these periods because all convertible preferred stock and stock options have been excluded from the computation of diluted weighted-average shares outstanding because such securities would have an antidilutive impact .

The Company has reported a net loss for the years ended December 31, 2020 and 2019, and the weighted average number of shares utilized for basic and diluted net loss per share attributable to common stockholders are the same for these periods because all convertible preferred stock and stock options have been excluded from the computation of diluted weighted-average shares outstanding because such securities would have an antidilutive impact.

Additionally, the fair value adjustment for the warrants was excluded from the computation of diluted net loss for the year ended December 31, 2020 since the additional income would have an antidilutive impact.

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Year Ended December 31,

Net income (loss)

Accumulation of dividends on preferred stock

Net loss available to common shareholders

Net loss per common share - basic

Net loss per common share - diluted

Net income (loss) available to common shareholders

Net income (loss) per common share - basic

Net income (loss) per common share - diluted

Weighted average number of shares of common stock - basic

Weighted average number of shares of common stock - diluted

Securities outstanding that are included in the computation above, utilizing the treasury stock method are as follows:

Year Ended December 31,

Stock options, SARs, and RSUs to purchase common stock

Potential common shares issuable upon conversion of preferred stock, exercise of stock options, and exercise of warrants that are excluded from the computation of diluted weighted-average shares outstanding as well as the warrant fair value adjustments excluded from the numerator are as follows:

Year Ended December 31,

Stock options to purchase common stock

Stock options, SARs, and RSUs to purchase common stock

Convertible preferred stock

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Federal income tax rate

Stock-based compensation

Valuation allowance

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Disallowed interest

Deferred rent

Lease obligations, net

Accrued rebates

Net deferred tax asset

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The Company has considered available positive and negative evidence to estimate if sufficient future taxable income will be generated to allow utilization of the existing deferred tax assets.

The Company has incurred operating losses and negative cash flows from operations since inception.

In light of these considerations, as well as the uncertainty as to when the Company might generate taxable income, the Company has recorded a full valuation allowance of $102,874, which represents an increase of $2,218 in the Company’s valuation allowance from December 31, 2019 to December 31, 2020.

Prior to the year ended December 31, 2021, the Company had incurred operating losses and negative cash flows from operations.

In light of these considerations, as well as the uncertainty as to when the Company might generate taxable income, the Company has recorded a full valuation allowance of $ 96,366 , which represents an decrease of $ 6,508 in the Company’s valuation allowance from December 31, 2020 to December 31, 2021.

The amount of the net deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income change or if objective negative evidence in no longer present and additional weight may be given to subjective evidence.

As of December 31, 2020 and 2019, the Company has approximately $159,395 and $147,823, respectively, of federal net operating loss ("NOL") carryforward available to offset future federal taxable income.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2021, 2020 and 2019 were as follows:

Year Ended December 31,

Valuation allowance at the beginning of the year

Decreases recorded as a benefit to income tax provision

Increases recorded to income tax provision

Valuation allowance at the end of the year

As of December 31, 2021 and 2020, the Company has approximately $ 98,069 and $ 159,395 , respectively, of federal net operating loss ("NOL") carryforward available to offset future federal taxable income.

The Company also has approximately $ 120,074 and $ 157,743 of state NOL carryforwards as of December 31, 2021 and 2020, respectively, available to offset future state taxable income.

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Expected volatility

54.2 % - 68.8

Risk-free interest rate

0.17 % - 1.56

Lack of marketability discount

Expected term (years)

RETIREMENT PLAN

The Company formed a 401(k) defined contribution savings plan (the “401(k) Plan”) on January 1, 2021.

The 401(k) Plan is for the benefit of all qualifying employees and permits voluntary contributions by employees limited by the IRS-imposed maximum.

Employer contributions were $ 2,479 for 2021.

RELATED-PARTY TRANSACTIONS

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In addition, the Chairman of the Company’s board of directors was the President and owner of the entity.

For the year ended December 31, 2020 and 2019, respectively, the Company incurred $7,384 and $5,378, respectively, in management fee expense and other expenses to this related party, which are included in general and administrative expense in the consolidated statements of operations and comprehensive loss.

For the years ended December 31, 2021, 2020 and 2019, the Company incurred $ 284 , $ 7,384 and $ 5,378 , respectively, in management fee expense and other expenses to this related party, which are included in general and administrative expense in the consolidated statements of operations and comprehensive income (loss).

The Company terminated the Management Services Agreement upon the consummation of its IPO.

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In addition, the Company had participated in certain transactions with separate related parties that also share common ownership with the Company, primarily related to combined employee health plans.

In August 2021, the Company paid a $ 2,300 advisory fee to Paragon in connection with the Blackstone Credit Agreement.

$ 2,000 of this payment was recorded in debt issuance costs as a component of long-term debt, net and $ 300 was recorded in common stock issuance costs as a component of additional paid-in capital, within the consolidated balance sheet as of December 31, 2021.

As of December 31, 2021 and 2020, respectively, the amounts due to related parties included in current liabilities were $ 0 and $ 0 , respectively, and the amount included in other assets was $ 0 and $ 1 , respectively.

SUBSEQUENT EVENTS

On January 6, 2021, the Company paid the $100,000 milestone payment to Bioprojet for the FDA approval of the NDA for WAKIX for the treatment of cataplexy in adult patients with narcolepsy.

In January and F e bruary 2021, the board of directors granted to various employees 882,606 employee stock options to purchase the Company’s common stock.

These awards were granted under the 2020 Plan and vest over a four-year period where 50% cliff vest after the second year and monthly thereafter.

Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure.

Subsequent to the year ended December 31, 2021, the Company attained $ 500,000 in aggregate net sales of WAKIX in the United States, which triggered a $ 40,000 payment under the provisions of the License Agreement.

The Company expects to make this payment in March 2022.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data