Harmony Biosciences Holdings, Inc. 10-Q

Item 1. Financial Statements HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) September 30, 2020 December 31, 2019 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 221,740 $ 24,457 Trade receivables, net 16,326 4,255 Inventory, net 2,311 1,088 Prepaid expenses 4,240 1,436 Other current assets 5,625 261 Total current assets 250,242 31,497 NONCURRENT ASSETS: Property and equipment, net 1,038 1,330 Restricted cash 750 750 Intangible asset, net 66,625 72,185 Other noncurrent assets 1,418 941 Total noncurrent assets 69,831 75,206 TOTAL ASSETS $ 320,073 $ 106,703 LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT) CURRENT LIABILITIES: Trade payables $ 9,347 $ 6,360 Accrued compensation 5,243 7,917 Accrued expenses 17,200 5,500 Other current liabilities — 115 Total current liabilities 31,790 19,892 NONCURRENT LIABILITIES: Deferred rent 305 287 Long term debt, net 192,858 97,946 Other noncurrent liabilities 571 163 Total noncurrent liabilities 193,734 98,396 TOTAL LIABILITIES 225,524 118,288 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 September 30, 2020 and December 31, 2019, respectively; 0 shares and 285,000,000 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively — 348,203 Series B convertible preferred stock - $1.25 stated value; 0 shares and 8,030,000 shares authorized at September 30, 2020 and December 31, 2019, respectively; 0 shares and 8,000,000 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively — 12,023 Series C convertible preferred stock - $1.96 stated value; 0 shares and 25,600,000 shares authorized at September 30, 2020 and December 31, 2019, respectively; 0 shares and 25,510,205 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively — 51,051 STOCKHOLDERS’ EQUITY (DEFICIT): Preferred stock - $0.00001 par value; 10,000,000 shares and 0 shares authorized at September 30, 2020 and December 31, 2019, respectively; 0 shares issued and outstanding at September 30 2020 and December 31, 2019 — — Common stock—$0.00001 par value; 500,000,000 shares and 423,630,000 shares authorized at September 30, 2020 and December 31, 2019, respectively; 56,888,625 shares and 7,787,470 issued and outstanding at September 30, 2020 and December 31, 2019, respectively 1 — Additional paid in capital 582,535 — Accumulated deficit (487,987 ) (422,862 ) TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) 94,549 (422,862 ) TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 320,073 $ 106,703 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements 1 HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net product revenues $ 45,609 $ — $ 103,454 $ — Cost of product sold 7,890 — 17,820 — Gross profit 37,719 — 85,634 — Operating expenses: Research and development 4,230 4,336 11,829 62,319 Sales and marketing 12,601 12,908 38,297 27,477 General and administrative 10,508 12,560 26,280 22,415 Total operating expenses 27,339 29,804 76,406 112,211 Operating income (loss) 10,380 (29,804 ) 9,228 (112,211 ) Loss on debt extinguishment — — (22,639 ) — Other expense, net (1,525 ) — (3,071 ) — Interest expense, net (6,946 ) (2,095 ) (20,254 ) (3,326 ) Income (loss) before income taxes 1,909 (31,899 ) (36,736 ) (115,537 ) Income taxes — — — — Net income (loss) and comprehensive income (loss) $ 1,909 $ (31,899 ) $ (36,736 ) $ (115,537 ) Accumulation of dividends on preferred stock (6,013 ) (9,027 ) (26,904 ) (25,656 ) Net loss available to common stockholders $ (4,104 ) $ (40,926 ) $ (63,640 ) $ (141,193 ) NET LOSS PER SHARE: Basic $ (0.14 ) $ (5.26 ) $ (4.15 ) $ (18.15 ) Diluted $ (0.14 ) $ (5.26 ) $ (4.15 ) $ (18.15 ) Weighted average number of shares of common stock - basic 30,212,959 7,777,100 15,324,362 7,777,100 Weighted average number of shares of common stock - diluted 30,212,959 7,777,100 15,324,362 7,777,100 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements 2 HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except share and per share data) Convertible Preferred Stock Series A, B, & C Common Stock Additional paid-in Accumulated Total stockholders’ equity Shares Amount Shares (1) Amount capital deficit (deficit) Balance as of December 31, 2019 318,510,205 $ 411,275 7,787,470 $ — $ — $ (422,862 ) $ (422,862 ) Net loss — — — — — (36,736 ) (36,736 ) Preferred stock dividend, Series A — 22,780 — — (1,048 ) (21,732 ) (22,780 ) Preferred stock accretion, Series A — 5,562 — — (3,572 ) (1,990 ) (5,562 ) Preferred stock dividend, Series B — 777 — — 1 (778 ) (777 ) Preferred stock accretion, Series B — 53 — — (37 ) (16 ) (53 ) Preferred stock dividend, Series C — 3,347 — — – (3,347 ) (3,347 ) Preferred stock accretion, Series C — 921 — — (563 ) (359 ) (922 ) Issuance of stock upon initial public offering, net of issuance costs — — 6,151,162 — 135,435 — 135,435 Conversion of Series A, B, C convertible stock to common stock (318,510,205 ) (444,715 ) 42,926,630 1 444,715 — 444,716 Reclassification of warrant liability to equity — — — — 5,468 — 5,468 Exercise of options — — 36,003 — 283 — 283 Stock-based compensation — — — — 1,870 — 1,870 Repurchase and cancellation of common units — — (12,175 ) — — (167 ) (167 ) Repurchase and cancellation of common units withheld for taxes — — (465 ) — (17 ) — (17 ) Balance as of September 30, 2020 — $ — 56,888,625 $ 1 $ 582,535 $ (487,987 ) $ 94,549 Convertible Preferred Stock Series A, B, & C Common Stock Additional paid-in Accumulated Total stockholders’ equity Shares Amount Shares (1) Amount capital deficit (deficit) Balance as of June 30, 2020 318,510,205 $ 434,009 7,805,848 $ — $ — $ (483,362 ) $ (483,362 ) Net loss — — — — — 1,909 1,909 Preferred stock dividend, Series A — 5,091 — — — (5,091 ) (5,091 ) Preferred stock accretion, Series A — 4,010 — — (3,572 ) (438 ) (4,010 ) Preferred stock dividend, Series B — 174 — — — (174 ) (174 ) Preferred stock accretion, Series B — 41 — — (37 ) (4 ) (41 ) Preferred stock dividend, Series C — 748 — — — (748 ) (748 ) Preferred stock accretion, Series C — 642 — — (563 ) (79 ) (642 ) Issuance of stock upon initial public offering, net of issuance costs — — 6,151,162 — 135,435 — 135,435 Conversion of Series A, B, C convertible stock to common stock (318,510,205 ) (444,715 ) 42,926,630 1 444,715 — 444,716 Reclassification of warrant liability to equity — — — — 5,468 — 5,468 Exercise of options — — 5,450 — 33 — 33 Stock-based compensation — — — — 1,073 — 1,073 Repurchase and cancellation of common units withheld for taxes — — (465 ) — (17 ) — (17 ) Balance as of September 30, 2020 — $ — 56,888,625 $ 1 $ 582,535 $ (487,987 ) $ 94,549 (1) Common stock of Harmony Bioscience s Holdings, Inc. 3 HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) - CONTINUED (In thousands, except share and per share data) Convertible Preferred Stock Series A, B, & C Common Stock Additional paid-in Accumulated Total stockholders’ equity Shares Amount Shares (1) Amount capital deficit (deficit) Balance as of December 31, 2018 293,000,000 $ 324,201 7,777,100 $ — $ — $ (242,673 ) $ (242,673 ) Net loss — — — — — (115,537 ) (115,537 ) Issuance of Series C convertible preferred stock, net of issuance costs 25,510,205 48,868 — — — — — Preferred stock dividend, Series A — 24,120 — — (1,104 ) (23,016 ) (24,120 ) Preferred stock accretion, Series A — 2,059 — — — (2,059 ) (2,059 ) Preferred stock dividend, Series B — 823 — — — (823 ) (823 ) Preferred stock accretion, Series B — 17 — — — (17 ) (17 ) Preferred stock dividend, Series C — 712 — — — (712 ) (712 ) Preferred stock accretion, Series C — 76 — — — (76 ) (76 ) Stock-based compensation — — — — 1,104 – 1,104 Balance as of September 30, 2019 318,510,205 $ 400,876 7,777,100 $ — $ — $ (384,913 ) $ (384,913 ) Convertible Preferred Stock Series A, B, & C Common Stock Additional paid-in Accumulated Total stockholders’ equity Shares Amount Shares (1) Amount capital deficit (deficit) Balance as of June 30, 2019 293,000,000 $ 342,213 7,777,100 $ — $ — $ (343,626 ) $ (343,626 ) Net loss — — — — — (31,899 ) (31,899 ) Issuance of Series C convertible preferred stock, net of issuance costs — 48,868 — — — — — Preferred stock dividend, Series A 25,510,205 8,040 — — (407 ) (7,633 ) (8,040 ) Preferred stock accretion, Series A — 687 — — — (687 ) (687 ) Preferred stock dividend, Series B — 274 — — — (274 ) (274 ) Preferred stock accretion, Series B — 6 — — — (6 ) (6 ) Preferred stock dividend, Series C — 712 — — — (712 ) (712 ) Preferred stock accretion, Series C — 76 — — — (76 ) (76 ) Stock-based compensation — — — — 407 — 407 Balance as of September 30, 2019 318,510,205 $ 400,876 7,777,100 $ — $ — $ (384,913 ) $ (384,913 ) (1) Common stock of Harmony Bioscience s Holdings, Inc. The accompanying notes are an integral part of the unaudited condensed consolidated financial statements 4 HARMONY BIOSCIENCES HOLDINGS, INC. AND S UBSIDIARY UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share and per share data) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (36,736 ) $ (115,537 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 294 300 Intangible amortization 5,560 965 Milestones associated with acquired in-process research & development (IPR&D) — 50,000 Stock-based compensation expense 1,870 1,104 Stock appreciation rights market adjustment 396 — Warrant expense 3,109 — Noncash paid-in-kind interest expense — 1,493 Debt issuance costs amortization 1,020 382 Loss on debt extinguishment 22,639 — Change in operating assets and liabilities: Trade receivables (12,071 ) — Inventory (1,223 ) (916 ) Prepaid expenses and other assets (8,169 ) 179 Other non-current assets (476 ) 75 Trade payables 2,987 7,491 Accrued expenses and other current liabilities 7,738 2,946 Other non-current liabilities 30 69 Net cash used in operating activities (13,032 ) (51,449 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2 ) (113 ) Milestone associated with acquired in-process research & development (IPR&D) — (50,000 ) Net cash used in investing activities (2 ) (50,113 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon initial public offering 147,628 — Initial public offering issuance costs (11,021 ) — Proceeds from issuance of preferred stock — 50,000 Preferred stock issuance costs — (1,132 ) Proceeds from long term debt 200,000 75,000 Debt issuance costs (5,804 ) (4,309 ) Extinguishment of debt (102,538 ) — Extinguishment of debt exit fees (18,047 ) — Proceeds from exercised options 283 — Repurchase of common stock (167 ) — Tax payments for employees shares withheld (17 ) — Net cash provided by financing activities 210,317 119,559 NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 197,283 17,997 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period 25,207 84,023 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—End of period $ 222,490 $ 102,020 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $ 19,549 $ 108 Cash paid during the year for milestones — 50,000 Supplemental Disclosures of Noncash Investing and Financing Activities: Series A Preferred Stock accrued return 22,780 24,120 Series A accretion of issuance costs 5,562 2,058 Series B Preferred Stock accrued return 777 823 Series B accretion of issuance costs 53 17 Series C Preferred Stock accrued return 3,347 712 Series C accretion of issuance costs 921 76 Warrant financing 2,359 — Warrant liability reclassified to equity 5,468 — The accompanying notes are an integral part of the unaudited condensed consolidated financial statements 5 HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 1. ORGANIZATION AND DESCRIPTION OF BUSINESS The Company 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 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 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. The Company is headquartered in Plymouth Meeting, Pennsylvania. 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. 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. Upon the closing of the IPO, all outstanding shares of the Company’s convertible preferred stock were automatically converted into shares of common stock and the accrued dividend payable to holders of the convertible preferred stock was paid out in shares of common stock, resulting in a total of 42,926,630 shares of common stock being issued to former holders of the Company’s convertible preferred stock. Warrants exercisable for convertible preferred stock were automatically converted into warrants exercisable for a total of 410,239 shares of common stock. Reverse Stock Split On August 11, 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. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased in accordance with the terms of the agreements governing such securities. Shares of common stock reserved for issuance upon the conversion of the Company’s Preferred Stock and preferred dividend were proportionately reduced. All references in the accompanying condensed consolidated financial statements and related notes to the number of shares of common stock, convertible preferred stock, warrants and options to purchase common stock and per share data reflect the effect of the reverse stock split. 2. LIQUIDITY AND CAPITAL RESOURCES The unaudited condensed 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 $487,987 and $422,862, as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the Company had cash and cash equivalents of $222,490. 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. 6 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 12 months fr o m the date of issuance of these unaudited condensed consolidated financial statements. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of September 30, 2020, condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019, and, condensed consolidated statements of operations and comprehensive income (loss) and the condensed consolidated statements of convertible preferred stock and shareholders’ equity (deficit) for the three and nine months ended September 30, 2020 and 2019, are unaudited. The balance sheet as of December 31, 2019 was derived from audited financial statements as of and for the year ended December 31, 2019. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements as of and for the year ended December 31, 2019, and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statements of the Company’s financial position as of September 30, 2020, and the results of its operations and its cash flows for the nine months ended September 30, 2019 and 2020. The condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and note disclosures of the Company normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted under the SEC’s rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes thereto for the year ended December 31, 2019. The balance sheet data as of December 31, 2019 was derived from the Company’s audited financial statements for the year ended December 31, 2019. Use of Estimates The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates that affect the amounts and disclosures in the Condensed Consolidated Financial Statements, including the notes thereto, and elsewhere in this report. Uncertainties related to the magnitude and duration of COVID-19, the extent to which it will impact our estimated future financial results, worldwide macroeconomic conditions including interest rates, employment rates, consumer spending and health insurance coverage, the speed of the anticipated recovery and governmental and business reactions to the pandemic have increased the complexity of developing these estimates, including the carrying amounts of long-lived assets, and the intangible asset. Actual results may differ significantly from our estimates, including as a result of COVID-19. Fair Value of Financial Instruments The Company’s unaudited condensed consolidated financial statements include cash, cash equivalents, accounts payable, and accrued liabilities, all of which are short term in nature and, accordingly, approximate fair value. Additionally, prior to the IPO, the Company’s unaudited condensed consolidated financial statements included a warrant liability that was carried at fair value and was re-measured at each balance sheet date until it would be exercised or expired. In connection with the IPO, the Warrants were re-evaluated under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480 Distinguishing Liabilities from Equity and reclassified to equity. See Note 13 for a further discussion of the warrants. It is the Company’s policy, in general, to measure non-financial assets and liabilities at fair value on a nonrecurring basis. The instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (such as evidence of impairment), which, if material, are disclosed in the accompanying footnotes. 7 The Company measures certain assets and liabilities at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures . ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creat es a fair value hierarchy that serves to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs a re inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows: Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities. Level 3—Valuations based on unobservable inputs and models that are supported by little or no market activity. Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents consist of cash and, if applicable, highly liquid investments with an original maturity of three months or less when purchased, including investments in Money Market Funds. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet that equal the amount reflected in the statements of cash flows. As of September 30, 2020 December 31, 2019 Cash and cash equivalents $ 221,740 $ 24,457 Restricted cash 750 750 Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $ 222,490 $ 25,207 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. Concentrations of Risk Substantially all of the Company’s cash and money market funds are held with a single financial institution. Due to its size, the Company believes this financial institution represents minimal credit risk. Deposits in this institution may exceed the amount of insurance provided on such deposits by the Federal Deposit Insurance Corporation for U.S. institutions. The Company has not experienced any losses on its deposits of cash and cash equivalents. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. The Company is also subject to credit risk from its trade receivables related to its product sales. 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. Customer creditworthiness is monitored and collateral is not required. Historically, the Company has not experienced credit losses on its accounts receivable. As of September 30, 2020, three customers accounted for 100% of gross accounts receivable, Caremark LLC (“CVS Caremark”), which accounted for 33% of gross accounts receivable; PANTHERx Specialty Pharmacy LLC (“Pantherx”), which accounted for 38% of gross accounts receivable; and Accredo Health Group, Inc. (“Accredo”), which accounted for 29% 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. For the nine months ended September 30, 2020, three customers accounted for 100% of gross product revenues; CVS Caremark accounted for 40% of gross product revenues; Pantherx accounted for 34% of gross product revenues; and Accredo accounted for 26% of gross product revenues. For the nine months ended September 30, 2019, revenues were zero. The Company depends on a single source supplier for its product, product candidates and their active pharmaceutical ingredient. 8 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 nine months ended September 30, 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 on the unaudited condensed consolidated statements of operations and comprehensive income (loss) is amortization of acquired developed technology of $1,867 and $5,560 for the three and nine months ended September 30, 2020, respectively. Advertising Expenses We expensed the costs of advertising, including promotional expenses, as incurred. Advertising expense was $3,138 and $1,343 for the three months ended September 30, 2020 and 2019, respectively, and was $8,576 and $2,445 for the nine months ended September 30, 2020 and 2019, respectively. Recently Issued Accounting Pronouncements 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. The new guidance clarifies the criteria for distinguishing between a finance lease and operating lease, as well as classification between the two types of leases, which is substantially unchanged from the previous lease guidance. Further, the new guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset, initially measured at the present value of the lease payments. For finance leases, a lessee should recognize interest on the lease liability separately from amortization of the right-of-use asset. 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. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU No. 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. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): 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. 9 4. INVENTORY Inventory, net consisted of the following: As of September 30, 2020 December 31, 2019 Raw materials $ 185 $ 384 Work in process 1,105 417 Finished goods 1,076 287 Inventory, gross 2,366 1,088 Reserve for obsolescence (55 ) — Total inventory, net $ 2,311 $ 1,088 5. 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 September 30, 2020 the remaining useful life was 9 years. The Company expects the annual amortization to be $7,407 for the next five 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. The gross carrying amount and net book value of the intangible asset is as follows: As of September 30, 2020 December 31, 2019 Gross Carrying Amount $ 75,000 $ 75,000 Accumulated Amortization (8,375 ) (2,815 ) Net Book Value $ 66,625 $ 72,185 6. 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 nine months ended September 30, 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 is due within 90 days of the Trigger Date. 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 nine months ended September 30, 2020, the Company has incurred $16,574 for sales-based, trademark and tiered royalties recognized as cost of product sold. As of September 30, 2020 and December 31, 2019, the Company had accrued $7,297 and $938, respectively, for sales-based, trademark and tiered royalties. 10 7. ACCRUED EXPENSES Accrued expenses consist of the following: As of September 30, 2020 December 31, 2019 Royalties due to third parties $ 7,297 $ 938 Rebates and other sales deductions 3,983 713 Research and development 2,119 894 Selling and marketing 1,782 1,547 Professional fees, consulting, and other services 1,881 510 Debt issuance costs — 638 Employee travel and other expenses 138 260 $ 17,200 $ 5,500 8. DEBT 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 unaudited condensed 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. Borrowings under the OrbiMed Loan are collateralized by all of the Company’s assets, excluding the intellectual property licensed through the License Agreement. The OrbiMed Loan bears an interest rate equal to the sum of (i) the greater of (a) 1-month LIBOR or (b) 2.00% per annum, plus (ii) 11.00% per annum, paid in cash monthly in arrears on the last day of each month starting in January 2020. 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 unaudited condensed consolidated statements of operations. The net cash received as a result of the transaction, less debt issuance costs of $5,778, 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 September 30, 2020 was $210,400. 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 unaudited condensed 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 September 30, 2020 is $2,064 and is presented in the unaudited condensed consolidated balance sheets as a direct deduction from the carrying value of the debt. 11 The balances of the OrbiMed Loan as of September 30, 2020 and the CRG Loan as of December 31, 2019 w ere as follows: September 30, 2020 December 31, 2019 Liability component - principal $ 200,000 $ 102,538 Debt discount associated with warrant financing (2,064 ) — Deferred financing cost (5,078 ) (4,592 ) Liability component - net carrying value $ 192,858 $ 97,946 Interest expense related to the OrbiMed Loan and CRG Loan were included in interest expense, net in the Condensed Consolidated Statements of Operations as follows: For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Interest on principal balance $ 6,655 $ 1,449 $ 19,549 $ 2,488 Interest on PIK — 870 — 1,493 Amortization of deferred financing costs 340 185 1,020 382 Total term loan interest expense $ 6,995 $ 2,504 $ 20,569 $ 4,363 9. COMMITMENTS AND CONTINGENCIES Litigation 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 2018 and 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 November 2019, the Company entered into an operating lease for approximately four thousand square feet of office space in Chicago, IL, which expires in December 2020. 12 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 $ 516 for the nine months ended September 30, 2020, compared to $ 442 for the nine months ended Septe mber 30, 2019. The following table sets forth the lease payment obligations as of September 30, 2020, for the periods indicated below: Years ending December 31, 2020 $ 363 2021 443 2022 443 2023 443 2024 184 Thereafter — Total $ 1,876 10. CONVERTIBLE PREFERRED STOCK Upon the closing of the IPO, all outstanding shares of the Company’s convertible preferred stock were automatically converted into shares of common stock and the accrued dividend payable to holders of the convertible preferred stock was paid out in shares of common stock, resulting in a total of 42,926,630 shares of common stock being issued to former holders of the Company’s convertible preferred stock. 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. 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. Preferred dividends on the Series A convertible preferred stock were cumulative and were compounded annually. As of September 30, 2020, Series A preferred shares and the cumulative unpaid preferred dividends reflect the reverse stock split and conversion to common stock. 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. Preferred dividends on the Series B convertible preferred stock were cumulative and were compounded annually. As of September 30, 2020, Series B preferred shares and the cumulative unpaid preferred dividends reflect the reverse stock split and conversion to common stock. 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. 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. Preferred dividends on the Series C convertible preferred stock were cumulative and were compounded annually. As of September 30, 2020, Series C preferred shares and the cumulative unpaid preferred dividends reflect the reverse stock split and conversion to common stock. 13 Dividends The holders of Series A, Series B, and Series C convertible preferred stock were entitled to receive, when and if declared by the board of directors of the Company, cumulative dividends equal to a 10% per annum of Series A, Series B, and Series C convertible preferred stock. In addition, the holders of the outstanding shares of Series A, Series B, and Series C convertible preferred stock were entitled to receive, when and if declared by the board of directors of the Company, a dividend at least equal to any dividend payable on the Company’s common stock as if all convertible preferred stock had been converted to common stock. No dividends were declared as of December 31, 2019. As part of the Company’s IPO, the Company’s accrued cumulative dividend was paid out to holders of Series A, Series B, and Series C convertible preferred stock in shares of the Company’s common stock and reflects the reverse stock split in connection with the mandatory conversion of the Series A, Series B, and Series C convertible preferred stock into shares of the Company’s common stock. 11. STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock On September 19, 2017, Harmony Biosciences II, LLC, was converted to a C corporation named Harmony Biosciences II, Inc., at which point the 7,709,434 outstanding common units of Harmony Biosciences II, LLC, were converted to 7,709,434 common shares of Harmony Biosciences II, Inc. On September 22, 2017, the Company issued warrants for 1,690,672 common shares, with an exercise price of $0.01 per share, to the holders of the Convertible Notes upon the consummation of an equity financing transaction and these warrants were immediately exercised resulting in the issuance of 1,690,672 common shares and proceeds of $139. On August 31, 2018, the Company repurchased and canceled 1,623,007 common shares from the former chief executive officer for $3,200. On August 11, 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. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased in accordance with the terms of the agreements governing such securities. 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. 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 incurred by the Company. The holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of the Company’s stockholders. The holders of common stock do not have any cumulative voting rights. Holders of common stock are entitled to receive ratably any dividends declared by the Company’s board of directors out of funds legally available for that purpose, subject to any preferential dividend rights of any outstanding preferred stock. 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 unaudited condensed consolidated results of operations for the year ended December 31, 2019. 12. STOCK INCENTIVE PLAN AND STOCK-BASED COMPENSATION Stock Incentive Plan On August 7, 2017, the Company adopted an equity incentive plan (the “Plan”). Under the 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. 14 In connection with th e 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. Upon the effectiveness of the 2020 Plan, no further grants will be made under the Equity Incentive Plan. However, th e Equity Incentive 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 st ock or cash based awards. Stock options under the Plan and the 2020 Plan have a 10-year contractual term and vest over the vesting period specified in the applicable award agreement (generally five years from the date of grant), 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 September 30, 2020 and December 31, 2019, are as follows: Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Awards outstanding—December 31, 2019 2,375,218 $ 8.22 8.33 Awards issued 2,812,135 $ 23.01 Awards exercised (36,003 ) $ 8.22 Awards forfeited (99,885 ) $ 11.07 Awards outstanding—September 30, 2020 5,051,465 $ 16.40 8.82 As of September 30, 2020 and December 31, 2019, stock awards issued under the Plan of 751,136 and 573,098 common shares, respectively, were vested. The Company has elected early adoption of ASU No. 2016-09 to recognize forfeitures as they occur. As a result of the adoption, for the nine months ended September 30, 2020, the Company reversed $2 out of stock-based compensation previously recorded, compared to $4 for the nine months ended September 30, 2019. 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. 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. The assumptions used to value the awards are summarized in the following table. As of September 30, 2020 December 31, 2019 Dividend yield 0.00 % 0.00 % Expected volatility 55.00 - 95.80 % 95.30 - 99.30 % Risk-free interest rate 0.32 - 0.51 % 1.60 - 2.59 % Lack of marketability discount 0.00 - 20.48 % 26.00 - 31.00 % Expected term (years) 5.4 - 6.5 6.5 The weighted average per share fair value of awards issued under the Plan was $9.39 and $3.38 in 2020 and 2019, respectively. 15 Stock-based compensation expense was $ 1,330 and $ 2,266 for the three and nine months ended September 30, 2020, compared to $ 407 and $ 1,104 for the three and nine months ended September 30, 2019 , and was recorded in the unaudited condensed consolidated statements of operations and comprehensive income ( loss ) in the following line items: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Research and development expense $ 141 $ 75 $ 310 $ 208 Sales and marketing expense 159 112 378 241 General and administrative expense 1,030 220 1,578 655 $ 1,330 $ 407 $ 2,266 $ 1,104 Options issued under the Plan are reflected as a component of equity in these unaudited condensed consolidated financial statements. 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, Stock Compensation Expense 2020 $ 4,687 2021 9,645 2022 9,514 2023 8,541 2024 7,809 2025 5,001 13. WARRANTS 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 unaudited condensed consolidated balance sheet. The portion of the OrbiMed Loan proceeds allocated to the warrant liability resulted in a debt discount, which is presented in the unaudited condensed 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 September 30, 2020 is $2,064 and is presented in the unaudited condensed consolidated balance sheet as a direct deduction from the carrying value of the debt. During the three and nine months ended September 30, 2020, a loss of $1,525 and $3,109 were recorded in other expense in the unaudited condensed consolidated statements of operations due to the change in the fair value of the warrant liability. See footnote 14 for the fair value of the Warrants. 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 nine months ended September 30, 2020 is as follows: Balance, beginning of period $ — Fair Value at Issuance 2,359 Change in fair value included in the statement of operations 3,109 Reclassification to equity (5,468 ) Balance, end of period $ — 16 1 4 . EARNINGS PER SHARE For the three and nine months ended September 30, 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. Under this method, net income is reduced by the amount of any dividends earned and the accretion of convertible preferred stock to its redemption value during the period. 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. 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 income (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. 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 their diluted net income per share during the period. The Company has reported a net loss for the three and nine months ended September 30, 2020 and 2019, and the 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 adjustments for the warrants have been excluded from the computation of diluted net loss for the three and nine months ended September 30, 2020 since the additional income would have an antidilutive impact. The following table sets forth the computation of basic and diluted net loss per share: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Numerator Net income (loss) $ 1,909 $ (31,899 ) $ (36,736 ) $ (115,537 ) Accumulation of dividends on preferred stock (6,013 ) (9,027 ) (26,904 ) (25,656 ) Net loss available to common shareholders $ (4,104 ) $ (40,926 ) $ (63,640 ) $ (141,193 ) Denominator Net loss per common share - basic $ (0.14 ) $ (5.26 ) $ (4.15 ) $ (18.15 ) Net loss per common share - diluted $ (0.14 ) $ (5.26 ) $ (4.15 ) $ (18.15 ) Weighted average number of shares of common stock - basic 30,212,959 7,777,100 15,324,362 7,777,100 Weighted average number of shares of common stock - diluted 30,212,959 7,777,100 15,324,362 7,777,100 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: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Stock options to purchase common stock 5,051,465 2,398,695 5,051,465 2,398,695 Convertible preferred stock — 37,421,645 — 36,257,953 Warrants 410,239 — 410,239 — Total 5,461,704 39,820,340 5,461,704 38,656,648 Adjustment for warrants $ 1,525 $ — $ 3,109 $ — 17 1 5 . FINANCIAL INSTRUMENTS The Company primarily applies the market approach to determine the fair value of financial instruments that are measured at fair value on a recurring basis. There were no changes to its valuation techniques used to determine the fair value of financial instruments during the nine months ended September 30, 2020. The Company’s financial assets and liabilities which are measured at fair value on a recurring basis were comprised of cash, cash equivalents, and restricted cash of $222,490 and $25,207 as of September 30, 2020 and December 31, 2019, respectively, based on Level 1 inputs. The Company estimates the fair value of the warrant liability using the Black-Scholes option-pricing model at each balance sheet date or when specific events occur. As discussed in Note 13, in connection with the Company’s IPO the warrant fair value was updated on August 19, 2020 with the change in fair value recorded in current period earnings as other expense in the unaudited condensed consolidated statement of operations and reclassified to equity. During the nine months ended September 30, 2020, a loss of $3,109 was recorded in other expense in the unaudited condensed consolidated statements of operations due to the change in the fair value of the warrant liability. The range of assumptions used to determine the fair value of the warrant liability through August 19, 2020 were as follows: Dividend yield 0.0 % Expected volatility 54.2% - 68.8 % Risk-free interest rate 0.17% - 1.56 % Lack of marketability discount 0.0 % Expected term (years) 1 - 4.5 16. RELATED-PARTY TRANSACTIONS The Company was party to a management agreement for professional services provided by a related party, Paragon. The related party is an entity that shares common ownership with the Company. In addition, the Chairman of the Company’s board of directors was the President and owner of the entity. For the three and nine months ended September 30, 2020, the Company incurred $3,628 and $7,101, respectively, in management fee expense and other expenses to this related party, which are included in general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss) as compared to $1,102 and $3,120 for the three and nine months ended September 30, 2019, respectively. The Company terminated the Management Services Agreement upon the consummation of its IPO. The Company is also party to a right of use agreement with the related party whereby it has access to and the right to use certain office space leased by the related party in Chicago, Illinois. In addition, the Company participates in certain transactions with separate related parties that also share common ownership with the Company, primarily related to combined employee health plans. As of September 30, 2020, and December 31, 2019, the amount due to related parties included in current liabilities was $193 and $1,208, respectively, and the amount included in other assets was $1 and $210, respectively. 17. SUBSEQUENT EVENTS 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. Pursuant to the License Agreement, upon the Trigger Date, the Company has paid Bioprojet $2,000 in October 2020 and will pay a milestone payment to Bioprojet of $100,000 within 90 days of the Trigger Date. Accordingly, the Company plans to make the milestone payment to Bioprojet on or before its due date. 18