Harmony Biosciences Holdings, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm 121 Consolidated Balance Sheets 122 Consolidated Statements of Operations and Comprehensive Loss 123 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) 124 Consolidated Statements of Cash Flows 125 Notes to Consolidated Financial Statements 126 120 Table of Contents R EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Harmony Biosciences Holdings, Inc. Opinion on the Financial Statements 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. Basis for Opinion These financial statements are the responsibility of the Company's management. 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Chicago, Illinois March 25, 2021 We have served as the Company's auditor since 2017. 121 Table of Contents HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 31, 2020 December 31, 2019 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 228,631 $ 24,457 Trade receivables, net 22,176 4,255 Inventory, net 3,823 1,088 Prepaid expenses 6,959 1,436 Other current assets 1,302 261 Total current assets 262,891 31,497 NONCURRENT ASSETS: Property and equipment, net 938 1,330 Restricted cash 750 750 Intangible asset, net 162,343 72,185 Other noncurrent assets 152 941 Total noncurrent assets 164,183 75,206 TOTAL ASSETS $ 427,074 $ 106,703 LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT) CURRENT LIABILITIES: Trade payables $ 2,556 $ 6,360 Accrued compensation 8,942 7,917 Accrued expenses 122,727 5,500 Other current liabilities 314 115 Total current liabilities 134,539 19,892 NONCURRENT LIABILITIES: Deferred rent 212 287 Long term debt, net 194,250 97,946 Other noncurrent liabilities 893 163 Total noncurrent liabilities 195,355 98,396 TOTAL LIABILITIES 329,894 118,288 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 December 31, 2020 and 2019, respectively; 0 shares and 285,000,000 shares issued and outstanding at December 31, 2020 and 2019, respectively — 348,203 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 — 12,023 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 — 51,051 STOCKHOLDERS’ EQUITY (DEFICIT): 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 — — 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 1 — Additional paid in capital 585,374 — Accumulated deficit (488,195 ) (422,862 ) TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) 97,180 (422,862 ) TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 427,074 $ 106,703 The accompanying notes are an integral part of the consolidated financial statements 122 Table of Contents HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except share and per share data) Year Ended December 31, 2020 2019 Net product revenues $ 159,742 $ 5,995 Cost of product sold 27,738 1,577 Gross profit 132,004 4,418 Operating expenses: Research and development 19,448 69,595 Sales and marketing 55,824 44,318 General and administrative 39,746 36,409 Total operating expenses 115,018 150,322 Operating income (loss) 16,986 (145,904 ) Loss on debt extinguishment (22,639 ) — Other expense, net (3,071 ) — Interest expense, net (28,220 ) (6,073 ) Loss before income taxes (36,944 ) (151,977 ) Income taxes — — Net loss and comprehensive loss $ (36,944 ) $ (151,977 ) Accumulation of dividends on preferred stock (26,904 ) (35,231 ) Net loss available to common stockholders $ (63,848 ) $ (187,208 ) NET LOSS PER SHARE: Basic $ (2.48 ) $ (24.07 ) Diluted $ (2.48 ) $ (24.07 ) Weighted average number of shares of common stock - basic 25,772,419 7,777,441 Weighted average number of shares of common stock - diluted 25,772,419 7,777,441 The accompanying notes are an integral part of the consolidated financial statements 123 Table of Contents HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY 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, 2018 293,000,000 $ 324,201 7,777,100 $ — $ — $ (242,673 ) $ (242,673 ) Net loss — — — — — (151,977 ) (151,977 ) Issuance of Series C convertible preferred stock, net of issuance costs 25,510,205 48,868 — — — — — Preferred stock dividend, Series A — 32,160 — — (9,994 ) (22,166 ) (32,160 ) Preferred stock accretion, Series A — 2,742 — — — (2,742 ) (2,742 ) Preferred stock dividend, Series B — 1,098 — — — (1,098 ) (1,098 ) Preferred stock accretion, Series B — 22 — — — (22 ) (22 ) Preferred stock dividend, Series C — 1,973 — — — (1,973 ) (1,973 ) Preferred stock accretion, Series C — 211 — — — (211 ) (211 ) Exercise of stock options — — 10,370 — 85 — 85 Stock-based compensation — — — — 9,909 — 9,909 Balance as of December 31, 2019 318,510,205 $ 411,275 7,787,470 $ — $ — $ (422,862 ) $ (422,862 ) Net loss — — — — — (36,944 ) (36,944 ) 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 — — 37,947 — 299 — 299 Stock-based compensation — — — — 4,693 — 4,693 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 December 31, 2020 — $ — 56,890,569 $ 1 $ 585,374 $ (488,195 ) $ 97,180 (1) Common stock of Harmony Biosciences Holdings, Inc. The accompanying notes are an integral part of the consolidated financial statements 124 Table of Contents HA RMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share and per share data) Year Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (36,944 ) $ (151,977 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 394 395 Intangible amortization 9,843 2,815 Milestones associated with acquired in-process research & development (IPR&D) 2,000 52,000 Stock-based compensation expense 4,693 9,909 Stock appreciation rights market adjustment 497 — Warrant expense 3,109 — Noncash paid-in-kind interest expense — 2,538 Debt issuance costs amortization 2,412 592 Loss on debt extinguishment 22,639 — Change in operating assets and liabilities: Trade receivables (17,922 ) (4,255 ) Inventory (2,735 ) (1,088 ) Prepaid expenses and other assets (6,563 ) 1,467 Other non-current assets 789 (420 ) Trade payables (3,804 ) 4,898 Accrued expenses and other current liabilities 18,450 7,763 Other non-current liabilities 157 (73 ) Net cash used in operating activities (2,985 ) (75,436 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2 ) (149 ) Milestone associated with acquired in-process research & development (IPR&D) (2,000 ) (52,000 ) Milestone and acquisition of intangible asset — (75,000 ) Net cash used in investing activities (2,002 ) (127,149 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon initial public offering 147,628 — Initial public offering issuance costs (12,193 ) — Proceeds from issuance of preferred stock — 50,000 Preferred stock issuance costs — (1,132 ) Proceeds from long term debt 200,000 100,000 Debt issuance costs (5,804 ) (5,184 ) Extinguishment of debt (102,538 ) — Extinguishment of debt exit fees (18,047 ) — Proceeds from exercised options 299 85 Repurchase of common stock (167 ) — Tax payments for employees shares withheld (17 ) — Net cash provided by financing activities 209,161 143,769 NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 204,174 (58,816 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period 25,207 84,023 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—End of period $ 229,381 $ 25,207 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $ 26,203 $ 4,230 Cash paid during the year for milestones 2,000 127,000 Supplemental Disclosures of Noncash Investing and Financing Activities: Series A Preferred Stock accrued return 22,780 32,160 Series A accretion of issuance costs 5,562 2,742 Series B Preferred Stock accrued return 777 1,098 Series B accretion of issuance costs 53 22 Series C Preferred Stock accrued return 3,347 1,973 Series C accretion of issuance costs 921 211 Warrant financing 2,359 — Warrant liability reclassified to equity 5,468 — The accompanying notes are an integral part of the consolidated financial statements 125 Table of Contents HARMONY BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY NOTES TO 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 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 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. As of December 31, 2020, the Company had cash and cash equivalents of $228,631. 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. 126 Table of Contents 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. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The 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. Significant Risks and Uncertainties The Company’s operations are subject to a number of factors that can affect its operating results and financial condition. Such factors include, but are not limited to, the results of clinical testing and trial activities of the Company’s product candidates; the Company’s ability to obtain regulatory approval to market its products; competition from products manufactured and sold or being developed by other companies; the price of, and demand for, the Company’s products, if approved; the Company’s ability to negotiate favorable licensing or other manufacturing and marketing agreements for its product candidates; and the Company’s ability to raise capital. The Company currently has one commercially approved product, WAKIX, and there can be no assurance that the Company’s research and development and clinical trials will result in any successfully commercialized products in addition to WAKIX. Developing and commercializing a product requires significant time and capital and is subject to regulatory review and approval as well as competition from other biotechnology and pharmaceutical companies. The Company operates in an environment of rapid change and is dependent upon the continued services of its employees and consultants and obtaining and protecting intellectual property. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the 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. Operating Segments The Company holds all its tangible assets, conducts its operations, and revenues are generated 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. The Company has determined it operates in a single operating segment and has one reportable segment. 127 Table of Contents Fair Value of Financial Instruments The Company’s 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 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. 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 creates 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 are 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 December 31, 2020 December 31, 2019 Cash and cash equivalents $ 228,631 $ 24,457 Restricted cash 750 750 Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $ 229,381 $ 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 128 Table of Contents 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. (“Accredo”), which accounted for 33% 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 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 product 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. Inventory 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. 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; 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. 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. 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. Intangible Asset Intangible assets with finite useful lives consist primarily of purchased developed technology and are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives associated with finite-lived intangible assets are consistent with the estimated lives of the associated products and may be modified when circumstances warrant. Such assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset. 129 Table of Contents 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. 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. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) 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. 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. 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 130 Table of Contents 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. Research and Development Expenses Research and development costs are expensed as incurred. Liabilities due to third parties in connection with research and development collaborations prior to regulatory approval are expensed as incurred. Upfront payments and pre-FDA approval milestone payments made for licensing of technology are expensed as research and development in the period in which they are incurred. Advance payments for goods and services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed. Advertising Expenses 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. Stock-Based Compensation The Company recognizes compensation expense relating to stock-based payment transactions in operating results using a fair value measurement method, in accordance with FASB ASC 718, Compensation-Stock Compensation. ASC 718 requires all stock-based payments to employees to be recognized in operating results as compensation expense based on fair value over the requisite service period of the awards. The vesting periods have a time-based provision consisting of three to five years and expire no more than 10 years after the date of grant. Upon a change of control, certain unvested awards will immediately vest. The Company determines the fair value of stock-based awards using the Black-Scholes option-pricing model, which uses both historical and current market data to estimate fair value. The method incorporates various assumptions, such as the risk-free interest rate, expected volatility, expected dividend yield, and expected life of the options. On January 1, 2019, the Company early adopted and accounts for stock-based payments granted to nonemployees in accordance with ASU 2018-07, Compensation – Stock Compensation (ASC 718): Improvements to Nonemployee Share – Based Payment Accounting. The Company determines the fair value of the stock-based payment as the fair value of the equity instruments issued. It is measured on the grant date. The Company also had nonemployee stock awards subject to a performance condition that are recognized based on probable outcome. 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. 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. The computation of diluted net loss per shares does not include the conversion of securities that would have an anti-dilutive effect. The basic and diluted computations of net loss per share for the Company are the same because the effects of the Company’s convertible securities would be anti-dilutive (see Note 14 for further detail). Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 131 Table of Contents Deferred tax assets may be reduced by a valuation allowance if, based on all available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management judgment is required in determining the period in which a reversal of a valuation allowance should occur. The Company is required to consider all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income among other items, in determining whether a full or partial release of its valuation allowance is required. The Company’s accounting for deferred tax consequences represents the best estimate of those future events. The Company presents deferred income taxes on the Consolidated Balance Sheet on a jurisdictional basis as either a net noncurrent asset or liability. The Company recognizes the effect of income tax positions only if those positions are more likely than not sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. 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. The Company’s policy is to include any interest and penalties as a component of income tax expense. 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). 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. 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. 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. 132 Table of Contents In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) , which provides guidance related to reference rate reform. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. 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. 4. INVENTORY Inventory, net consisted of the following: As of December 31, 2020 December 31, 2019 Raw materials $ 396 $ 384 Work in process 2,660 417 Finished goods 941 287 Inventory, gross 3,997 1,088 Reserve for obsolescence (174 ) — Total inventory, net $ 3,823 $ 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 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. The Company expects the future annual amortization expense for the unamortized intangible assets to be as follows: Years ending December 31, 2021 $ 18,569 2022 18,569 2023 18,569 2024 18,569 2025 18,569 Total $ 92,845 133 Table of Contents The gross carrying amount and net book value of the intangible asset is as follows: As of December 31, 2020 December 31, 2019 Gross Carrying Amount $ 175,000 $ 75,000 Accumulated Amortization (12,657 ) (2,815 ) Net Book Value $ 162,343 $ 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 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. As of December 31, 2020 and 2019, the Company had accrued $9,006 and $938, respectively, for sales-based, trademark and tiered royalties. At December 31, 2020 the Company had accrued $100,000 for the milestone payment to Bioprojet. 7. ACCRUED EXPENSES Accrued expenses consist of the following: As of December 31, 2020 December 31, 2019 Milestone payment $ 100,000 $ — Royalties due to third parties 9,006 938 Rebates and other sales deductions 7,803 713 Research and development 2,186 894 Selling and marketing 1,905 1,547 Professional fees, consulting, and other services 1,081 510 Debt issuance costs — 638 Other expenses 746 260 $ 122,727 $ 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 134 Table of Contents 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. 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. 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: December 31, 2020 December 31, 2019 Liability component - principal $ 200,000 $ 102,538 Exit fee 14,000 — Unamortized debt discount associated with the exit fee, debt financing costs and discount with warrant financing (19,750 ) (4,592 ) Liability component - net carrying value $ 194,250 $ 97,946 Interest expense related to the OrbiMed Loan and CRG Loan were included in interest expense, net in the Consolidated Statements of Operations as follows: Year Ended December 31, 2020 2019 Interest on principal balance $ 26,203 $ 4,231 Interest on PIK — 2,538 Amortization of deferred financing costs 2,412 592 Total term loan interest expense $ 28,615 $ 7,361 135 Table of Contents 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 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: Years ending December 31, 2021 $ 534 2022 875 2023 892 2024 334 2025 — Thereafter — Total $ 2,635 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. 136 Table of Contents 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. 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. 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 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 137 Table of Contents 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. 12. STOCK INCENTIVE PLAN AND STOCK-BASED COMPENSATION 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. 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: Number of Awards Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Awards outstanding—December 31, 2019 2,375,218 $ 8.22 8.33 Awards issued 3,035,400 $ 24.54 Awards exercised (37,947 ) $ 8.22 Awards forfeited (112,545 ) $ 10.75 Awards outstanding—December 31, 2020 5,260,126 $ 17.58 8.63 As of December 31, 2020 and 2019, stock awards issued under the 2017 and 2020 Plans of 987,538 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 year ended December 31, 2020 and 2019, respectively, the Company reversed $3 and $4 out of stock-based compensation previously recorded. 138 Table of Contents 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 December 31, 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 - 0.56 % 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 $10.06 and $3.45 in 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: Year Ended December 31, 2020 2019 Research and development expense $ 586 $ 287 Sales and marketing expense 703 351 General and administrative expense 3,901 9,271 $ 5,190 $ 9,909 Options issued under the 2017 Plan and 2020 Plan are reflected as a component of equity in these 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 2021 $ 11,046 2022 10,915 2023 9,928 2024 8,949 2025 5,003 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 139 Table of Contents 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 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 , 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 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 2,359 Change in fair value included in the statement of operations 3,109 Reclassification to equity (5,468 ) Balance, end of period $ — 14. EARNINGS PER SHARE 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. 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 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. 140 Table of Contents 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 . 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. The following table sets forth the computation of basic and diluted net loss per share: Year Ended December 31, 2020 2019 Numerator Net loss $ (36,944 ) $ (151,977 ) Accumulation of dividends on preferred stock (26,904 ) (35,231 ) Net loss available to common shareholders $ (63,848 ) $ (187,208 ) Denominator Net loss per common share - basic $ (2.48 ) $ (24.07 ) Net loss per common share - diluted $ (2.48 ) $ (24.07 ) Weighted average number of shares of common stock - basic 25,772,419 7,777,441 Weighted average number of shares of common stock - diluted 25,772,419 7,777,441 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, 2020 2019 Stock options to purchase common stock 5,260,126 2,271,632 Convertible preferred stock — 36,891,576 Warrants 410,239 — Total 5,670,365 39,163,208 Adjustment for warrants $ 3,109 $ — 15. income taxes Details of the provision for income taxes consist of the following: Year Ended December 31, 2020 2019 Federal $ (6,416 ) $ (32,508 ) State 4,198 (9,641 ) Valuation allowance 2,218 42,149 $ — $ — Current $ — $ — Deferred (2,218 ) (42,149 ) Valuation allowance 2,218 42,149 Total $ — $ — 141 Table of Contents The reasons for the difference between the statutory federal income tax rate and the Company’s effective income tax rate as of December 31, 20 20 and 201 9 are as follows: Year Ended December 31, 2020 2019 Federal income tax rate 21.0 % 21.0 % State taxes (11.4 ) 6.3 Other (3.6 ) 0.4 Valuation allowance (6.0 ) (27.7 ) Total — % — % Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019, are as follows: As of December 31, 2020 2019 Assets Liabilities Assets Liabilities Acquired in-process research and development $ 45,346 $ — $ 50,628 $ — Net operating loss carryforward 44,983 — 41,427 — Accrued compensation 4,075 — 5,158 — Credits 1,604 — 1,682 — Disallowed interest 7,751 — 1,661 — Deferred rent 121 — 160 — Fixed assets 65 — 46 — Inventory 100 — — — Other 71 1,242 61 167 Total $ 104,116 1,242 $ 100,823 167 Net deferred tax asset $ 102,874 $ — $ 100,656 $ — Valuation allowance $ (102,874 ) $ — $ (100,656 ) $ — Total $ — $ — $ — $ — 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. 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. The Company also has approximately $157,743 and $139,336 of state NOL carryforwards as of December 31, 2020 and 2019, respectively, available to offset future state taxable income. All of the Company's tax years remain open to examination by federal and state taxing authorities. The Company's pre-2018 federal NOLs expire in 2037 whereas the Company's NOLs arising in 2018, and subsequent years, have an unlimited carryforward period. The Company's state NOLs begin to expire in 2037. Utilization of the net operating loss carryforwards may be subject to a substantial limitation due to ownership change limitations that may occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. As of December 31, 2020 and 2019, the Company has federal tax credits of $1,603 and $837, respectively. These credits begin to expire in 2037. 142 Table of Contents 16. 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 year ended December 31, 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 $229,381 and $25,207 as of December 31, 2020 and 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 consolidated statement of operations and reclassified to equity. 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. 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 17. 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 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. 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 had participated in certain transactions with separate related parties that also share common ownership with the Company, primarily related to combined employee health plans. As of December 31, 2020 and 2019, respectively, the amounts due to related parties included in current liabilities were $0 and $1,208, respectively, and the amount included in other assets was $1 and $210, respectively. 18. 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. 143 Table of Contents Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. None.