SUPERNUS PHARMACEUTICALS, INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Supernus Pharmaceuticals, Inc. Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm (PCAOB ID 185 ) 95 Consolidated Balance Sheets 99 Consolidated Statements of Earnings 100 Consolidated Statements of Comprehensive Earnings 101 Consolidated Statements of Changes in Stockholders' Equity 102 Consolidated Statements of Cash Flows 103 Notes to Consolidated Financial Statements 104 94 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Supernus Pharmaceuticals, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Supernus Pharmaceuticals, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of earnings, comprehensive earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 13, 2022 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accrued sales deductions related to product returns As disclosed in Notes 2 and 13 to the consolidated financial statements, the Company recorded accrued product returns of $35,127 (dollars in thousands) as of December 31, 2021. The related provision for product returns is reflected as a reduction of gross product sales, and is recorded at the time of sale when the customer takes title to the product. Sale of the Company's products are not subject to a general right of return; however, the Company will accept return of expired product six months prior to and up to 12 months subsequent to the product's expiry date for certain products. The Company's products have a shelf life of up to 48 months from date of manufacture. We identified the evaluation of accrued sales deductions related to Trokendi XR and Oxtellar XR product returns, and specifically the assessment of the expected long-term return rates, as a critical audit matter. The assessment of the expected long-term return rates included a comparison to actual returns experience and involved a high degree of auditor judgment due to the significant passage of time between product sale and the time at which the Company issues credit for expired product. 95 Table of Contents The following are the primary procedures we performed to address this critical audit matter. We assessed the Company's long-term return rate assumptions by evaluating the consistency of those assumptions with the trend of actual historical return rates. We compared prior period expected long-term return rate assumptions against actual return rates experience. /s/ KPMG LLP We have served as the Company's auditor since 2015. Baltimore, Maryland April 13, 2022 96 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Supernus Pharmaceuticals, Inc.: Opinion on Internal Control Over Financial Reporting We have audited Supernus Pharmaceuticals, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31 , 2021 and 2020, the related consolidated statements of earnings, comprehensive earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated April 13, 2022 expressed an unqualified opinion on those consolidated financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses related to the Company not having sufficient resources and as a result, the Company did not adequately perform the following: assess, redesign and timely evaluate performance of controls over financial reporting risks as a result of existing circumstances; train, monitor, and supervise newly hired contractors and employees; and generate real time information across the organization to allow the finance department to perform timely controls; which in the aggregate, create a reasonable possibility that material misstatements in substantially all financial reporting processes and financial statement accounts in the consolidated financial statements will not be prevented or detected on a timely basis, have been identified and included in management's assessment. The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. The Company acquired Adamas Pharmaceuticals, Inc. during 2021, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2021, Adamas Pharmaceuticals, Inc's internal control over financial reporting associated with 8% of total assets (excluding the goodwill and other intangible assets, which are included within the scope of the assessment) and 2% of total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Adamas Pharmaceuticals, Inc. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally 97 Table of Contents accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Baltimore, Maryland April 13, 2022 98 Table of Contents Supernus Pharmaceuticals, Inc. Consolidated Balance Sheets (in thousands, except share amounts) December 31, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 203,434 $ 288,640 Marketable securities 136,246 133,893 Accounts receivable, net 148,932 140,877 Inventories, net 85,959 48,325 Prepaid expenses and other current assets 27,019 18,682 Total current assets 601,590 630,417 Long term marketable securities 119,166 350,359 Property and equipment, net 16,955 37,824 Intangible assets, net 784,693 364,342 Goodwill 117,516 77,911 Other assets 49,232 43,249 Total assets $ 1,689,152 $ 1,504,102 Liabilities and stockholders’ equity Current liabilities Accounts payable and accrued liabilities $ 117,683 $ 78,934 Accrued product returns and rebates 132,724 126,192 Contingent consideration, current portion 44,840 30,900 Other current liabilities 20,132 9,082 Total current liabilities 315,379 245,108 Convertible notes, net 379,252 361,751 Contingent consideration, long term 35,637 45,800 Operating lease liabilities, long term 41,298 28,579 Deferred income tax liabilities, net 85,355 35,215 Other liabilities 16,380 42,791 Total liabilities 873,301 759,244 Stockholders’ equity Common stock, $ 0.001 par value; 130,000,000 shares authorized; 53,256,094 and 52,868,482 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 53 53 Additional paid-in capital 434,337 409,332 Accumulated other comprehensive earnings, net of tax 1,539 8,975 Retained earnings 379,922 326,498 Total stockholders’ equity 815,851 744,858 Total liabilities and stockholders’ equity $ 1,689,152 $ 1,504,102 See accompanying notes. 99 Table of Contents Supernus Pharmaceuticals, Inc. Consolidated Statements of Earnings (in thousands, except share and per share data) Years Ended December 31, 2021 2020 2019 Revenue Net product sales $ 567,504 $ 509,350 $ 383,400 Royalty revenue 12,271 11,047 9,355 Total revenues 579,775 520,397 392,755 Costs and expenses Cost of goods sold (a) 75,061 52,459 16,660 Research and development 90,467 75,961 69,099 Selling, general and administrative 304,759 200,677 153,246 Amortization of intangible assets 29,989 15,702 5,179 Contingent consideration (gain) expense ( 6,530 ) 1,900 — Total costs and expenses 493,746 346,699 244,184 Operating earnings 86,029 173,698 148,571 Other (expense) income Interest expense ( 23,423 ) ( 23,754 ) ( 22,707 ) Interest and other income, net 10,569 18,704 21,623 Total other expense ( 12,854 ) ( 5,050 ) ( 1,084 ) Earnings before income taxes 73,175 168,648 147,487 Income tax expense 19,751 41,698 34,431 Net earnings $ 53,424 $ 126,950 $ 113,056 Earnings per share Basic $ 1.01 $ 2.41 $ 2.16 Diluted $ 0.98 $ 2.36 $ 2.10 Weighted-average shares outstanding Basic 53,099,330 52,615,269 52,412,181 Diluted 54,356,744 53,689,743 53,816,754 (a) Excludes amortization of acquired intangible assets. See accompanying notes. 100 Table of Contents Supernus Pharmaceuticals, Inc. Consolidated Statements of Comprehensive Earnings (in thousands) Years Ended December 31, 2021 2020 2019 Net earnings $ 53,424 $ 126,950 $ 113,056 Other comprehensive earnings (loss): Unrealized gain (loss) on marketable securities, net of tax ( 7,436 ) 1,558 10,575 Other comprehensive earnings (loss), net of tax ( 7,436 ) 1,558 10,575 Comprehensive earnings $ 45,988 $ 128,508 $ 123,631 See accompanying notes. 101 Table of Contents Supernus Pharmaceuticals, Inc. Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2019, 2020 and 2021 (in thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Earnings (Loss) Retained Earnings (Accumulated Deficit) Total Stockholders' Equity Shares Amount Balance, December 31, 2018 52,316,583 $ 52 $ 369,637 $ ( 3,158 ) $ 86,492 $ 453,023 Share-based compensation — — 14,846 — — 14,846 Issuance of common stock in connection with the Company’s equity award plans 216,765 1 3,927 — — 3,928 Net earnings — — — — 113,056 113,056 Unrealized gain on marketable securities, net of tax — — — 10,575 — 10,575 Balance, December 31, 2019 52,533,348 53 388,410 7,417 199,548 595,428 Share-based compensation — — 16,561 — — 16,561 Issuance of common stock in connection with the Company’s equity award plans 335,134 — 4,361 — — 4,361 Net earnings — — — — 126,950 126,950 Unrealized gain on marketable securities, net of tax — — — 1,558 — 1,558 Balance, December 31, 2020 52,868,482 53 409,332 8,975 326,498 744,858 Share-based compensation — — 17,910 — — 17,910 Issuance of common stock in connection with the Company’s equity award plans 387,612 — 7,095 — — 7,095 Net earnings — — — — 53,424 53,424 Unrealized loss on marketable securities, net of tax — — — ( 7,436 ) — ( 7,436 ) Balance, December 31, 2021 53,256,094 $ 53 $ 434,337 $ 1,539 $ 379,922 $ 815,851 See accompanying notes. 102 Table of Contents Supernus Pharmaceuticals, Inc. Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 2021 2020 2019 Cash flows from operating activities Net earnings $ 53,424 $ 126,950 $ 113,056 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 32,595 18,141 6,659 Navitor investment R&D expense 15,000 — — Amortization of deferred financing costs and debt discount 17,501 16,581 15,708 Share-based compensation expense 17,910 16,561 14,846 Realized gains from sales of marketable securities ( 347 ) ( 4,352 ) ( 301 ) Amortization of premium/discount on marketable securities 418 ( 2,889 ) ( 4,034 ) Changes in fair value of contingent consideration ( 6,530 ) 1,900 — Other noncash adjustments, net ( 1,420 ) 1,454 2,226 Deferred income tax (benefit) provision ( 4,994 ) 568 ( 5,832 ) Changes in operating assets and liabilities: Accounts receivable 3,867 ( 34,607 ) 15,751 Inventories ( 14,580 ) ( 10,124 ) ( 969 ) Prepaid expenses and other assets ( 8,398 ) ( 10,442 ) ( 2,864 ) Accrued product returns and rebates 4,502 10,386 566 Accounts payable and other liabilities 18,179 8,272 ( 11,683 ) Net cash provided by operating activities 127,127 138,399 143,129 Cash flows from investing activities Sales and maturities of marketable securities 530,509 378,422 253,170 Purchases of marketable securities ( 311,573 ) ( 95,890 ) ( 409,707 ) Acquisition of USWM, net of cash acquired ( 950 ) ( 298,541 ) — Acquisition of Adamas, net of cash acquired ( 310,742 ) — — Distribution from (investment in) Navitor 12,888 ( 15,000 ) — Purchase of property and equipment and deferred legal fees paid ( 2,045 ) ( 3,690 ) ( 1,387 ) Net cash used in investing activities ( 81,913 ) ( 34,699 ) ( 157,924 ) Cash flows from financing activities Proceeds from issuance of common stock 7,095 4,361 3,928 Proceeds from governmental loan and grant 800 — — Repayment of acquired Adamas loan ( 138,315 ) — — Payments on finance lease liability — ( 802 ) — Net cash (used in) provided by financing activities ( 130,420 ) 3,559 3,928 Net change in cash and cash equivalents ( 85,206 ) 107,259 ( 10,867 ) Cash and cash equivalents at beginning of year 288,640 181,381 192,248 Cash and cash equivalents at end of year $ 203,434 $ 288,640 $ 181,381 Supplemental cash flow information: Cash paid for interest on convertible notes $ 2,516 $ 2,516 $ 2,516 Cash paid for operating leases $ 11,908 $ 6,949 $ 5,337 Income taxes paid $ 25,190 $ 45,428 $ 51,540 Noncash investing and financing activity: Contingent consideration liability related to acquisitions $ 10,307 $ 76,700 $ — Lease assets and tenant receivable obtained for new operating leases $ 10,868 $ 2,478 $ 35,594 Lease assets obtained for new finance lease $ — $ 22,747 $ — Property and equipment additions from utilization of tenant improvement allowance $ 25 $ — $ 10,151 See accompanying notes. 103 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 1. Organization and Business Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware and commenced operations in 2005. The Company is a biopharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases. The Company's diverse neuroscience portfolio includes approved treatments for epilepsy, migraine, attention-deficit hyperactivity disorder (ADHD), hypomobility in Parkinson's Disease (PD), cervical dystonia, chronic sialorrhea, dyskinesia in PD patients receiving levodopa-based therapy, and drug-induced extrapyramidal reactions in adult patients. The Company is developing a broad range of novel CNS product candidates including new potential treatments for hypomobility in PD, epilepsy, depression, and other CNS disorders. The Company has eight commercial products: Trokendi XR®, Oxtellar XR®, Qelbree®, APOKYN®, XADAGO®, MYOBLOC®, GOCOVRI®, and Osmolex ER®. In addition, the Company has two late-stage development products included in its product candidates portfolio, including SPN-830 (apomorphine infusion device), an acquired product candidate from the USWM Acquisition. In February 2022, the Company's New Drug Application (NDA) for SPN-830 (apomorphine infusion device) was accepted for review by the U.S. Food and Drug Administration (FDA) and was assigned a Prescription Drug User Fee Act (PDUFA) target action date of October 7, 2022. 2021 Adamas Acquisition On October 10, 2021, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement”) by and among the Company, Adamas Pharmaceuticals, Inc. (Adamas) and Supernus Reef, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (Purchaser). On November 24, 2021, the Purchaser was merged with and into Adamas (the "Merger"), with Adamas continuing as the surviving corporation in the Merger as a wholly owned subsidiary of the Company (the Adamas Acquisition). At the time of the Adamas Acquisition, Adamas had two established commercial products in its portfolio, GOCOVRI and Osmolex ER, in addition to royalty rights to Namzaric. Refer to Note 3, Acquisitions , for further discussion on the Adamas Acquisition. Navitor Development Agreement On April 21, 2020, the Company entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor). Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) in treatment-resistant depression (TRD). Refer to Note 5, Investments , for further discussion on the Navitor Development Agreement. 2020 USWM Acquisition On April 28, 2020, the Company entered into a Sale and Purchase Agreement with US WorldMeds Partners, LLC to acquire the CNS portfolio of USWM Enterprises, LLC (USWM Enterprises) (the USWM Acquisition). With the acquisition, completed on June 9, 2020, the Company added three established commercial products, APOKYN, XADAGO, and MYOBLOC, and a product candidate in late-stage development, SPN-830 (apomorphine infusion device), to its portfolio. Refer to Note 3, Acquisitions , for further discussion on the USWM Acquisition. Ransomware Incident On November 24, 2021, we announced that we were the target of a ransomware attack. The attack had no significant impact on our business and did not cause any long-term disruption to our operations. Based on the preliminary results of the ongoing investigation, the Company believes the criminal ransomware groups ("criminal groups") copied certain data from our systems, encrypted certain data on the Company's systems, and then deployed malware designed to impede access to our systems. Thereafter the criminal groups contacted the Company and threatened to publish certain data copied from the Company's systems. Upon detection of the ransomware attack, the Company notified government authorities, engaged third-party cybersecurity experts through our outside counsel, and commenced its recovery process. The Company maintains redundant off-site data backups, which were verified to have not been compromised by the ransomware attack and were utilized to restore the data encrypted by the criminal groups. At this time, the Company has successfully recovered the impacted files and has taken additional steps designed to further protect its networks and files. We have not paid any ransom amounts. We have incurred costs in 2021 and expect 104 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 1. Organization and Business (Continued) to continue to incur costs in the future, which may be significant, in connection with efforts designed to enhance our data security and take further steps designed to protect against unauthorized access to, or manipulation of, our systems and data. These costs were primarily comprised of certain employee related expenses and various third party consulting services, including forensic experts, legal counsel and other IT and accounting professional expenses, and enhancements to our cyber security measures. We expect to incur additional costs related to the ransomware attack in the future, including costs related to our response to the ransomware incident and our efforts designed to enhance our security measures. The Company continues to monitor the situation. Refer to Note 15, Commitments and Contingencies . 2. Summary of Significant Accounting Policies Basis of Presentation The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). The Company, which is primarily located in the United States (U.S.), operates in one operating segment. Reclassifications Certain prior year amounts in the consolidated balance sheets, statements of cashflows, and statements of earnings have been reclassified to conform to the current year presentation, including a reclassification made to present amortization of intangible assets separately. This was previously included in Selling, general and administrative expenses and now is recorded as a component of Amortization of intangible assets on the consolidated statements of earnings . These reclassifications did not affect operating earnings or other consolidated financial statements for the years ended December 31, 2021, 2020, and 2019. Consolidation The Company's consolidated financial statements include the accounts of: Supernus Pharmaceuticals, Inc.; Supernus Europe Ltd.; Biscayne Neurotherapeutics, Inc. and its wholly owned subsidiaries; MDD US Enterprises, LLC (formerly USWM Enterprises, LLC) and its wholly owned subsidiaries; and Adamas Holdings, LLC. and its wholly owned subsidiaries. These are collectively referred to herein as "Supernus" or "the Company." All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements reflect the consolidation of entities in which the Company has a controlling financial interest. In determining whether there is a controlling financial interest, the Company considers if it has a majority of the voting interests of the entity, or if the entity is a variable interest entity (VIE) and if the Company is the primary beneficiary. In determining the primary beneficiary of a VIE, the Company evaluates whether it has both: the power to direct the activities of the VIE that most significantly impact the VIE's economic performance; and the obligation to absorb losses of, or the right to receive benefits from the VIE that could potentially be significant to that VIE. The Company's judgment with respect to its level of influence or control of an entity involves the consideration of various factors, including the form of an ownership interest; representation in the entity's governance; the size of the investment; estimates of future cash flows; the ability to participate in policymaking decisions; and the rights of the other investors to participate in the decision making process, including the right to liquidate the entity, if applicable. If the Company is not the primary beneficiary of the VIE, and an ownership interest is maintained in the entity, the interest is accounted for under the equity or cost methods of accounting, as appropriate. The Company continuously assesses whether it is the primary beneficiary of a VIE as changes to existing relationships or future transactions may affect its conclusions. Use of Estimates The Company bases its estimates on historical experience; various forecasts; information received from its service providers; information from other sources, including public and proprietary sources; and other assumptions that the Company 105 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) believes are reasonable under the circumstances. Actual results could differ materially from the Company's estimates. The Company periodically evaluates the methodologies employed in making its estimates on an ongoing basis. The extent to which the COVID-19 pandemic may directly or indirectly impact our business, financial condition and results of operations is highly uncertain and subject to change. As a result, certain of our estimates and assumptions, including the provision for sales deductions (i.e., provision for estimated rebates, provision for estimated future product returns, and an estimated provision for discounts), the creditworthiness of customers entering into revenue arrangements, the valuation of the assets and liabilities acquired in the acquisitions, and the fair values of our financial instruments, require increased judgment and carry a higher degree of variability and volatility that could result in material changes to our estimates in future periods. Cash and Cash Equivalents The Company considers all investments in highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. Marketable Securities Marketable securities consist of investments in U.S. Treasury bills and notes; bank certificates of deposit; various U.S. government agency debt securities; corporate and municipal debt securities; and other fixed income securities. The Company places all investments with governmental, industrial, or financial institutions whose debt is rated as investment grade. The Company's investments are classified as available-for-sale and are carried at fair value. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets. Any unrealized holding gains or losses on debt securities, including their tax effect, are reported as components of Other comprehensive earnings (loss) in the consolidated statement of comprehensive earnings. Realized gains and losses, included in Interest and other income, net in the consolidated statement of earnings, are determined using the specific identification method for determining the cost of securities sold. The Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020, using the allowance approach. Declines in fair value below amortized cost related to credit losses (i.e., impairment due to credit losses) are included in the consolidated statement of earnings, with a corresponding allowance established. If the estimate of expected credit losses decreases in subsequent periods, the Company will reverse the credit losses through current period earnings and adjust the allowance accordingly. Refer to Recently Issued Accounting Pronouncements in this Note 2. Business Combinations and Contingent Considerations In determining whether an acquisition should be accounted for as a business combination or as an asset acquisition, the Company makes certain judgments regarding whether the acquired set of activities and assets meets the definition of a business. Significant judgment is required in assessing whether the acquired processes or activities, along with their inputs, would be substantive to constitute a business, as defined by U.S. GAAP. If the acquired set of activities and assets does not meet the definition of a business, the transaction is accounted for as an asset acquisition. In an asset acquisition, any acquired research and development that does not have an alternative future use is charged to expense as of the acquisition date, and no goodwill is recorded. If the acquired set of activities and assets meets the definition of a business, the Company applies the acquisition method of accounting and accounts for the transaction as a business combination. In a business combination, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, if applicable, is recorded as goodwill. In a business combination, the operating results of the acquired business are included in the Company's consolidated statement of earnings, beginning on the effective acquisition date. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. 106 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Significant judgment is involved in the determination of the fair value assigned to assets acquired and liabilities assumed in a business combination, as well as the estimated useful lives of assets. These estimates can materially affect our consolidated results of operations and financial position. The fair value of intangible assets are determined using information available as of the acquisition date and are based on estimates and assumptions that are deemed reasonable by management. Significant estimates and assumptions include but are not limited to: the probability of regulatory approval, revenue growth, and appropriate discount rate. Depending on the facts and circumstances, the Company may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed as of the acquisition date, estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information related to facts and circumstances existing as of the acquisition date and evaluates these estimates and assumptions. The Company records measurement period adjustments to the Company's preliminary estimates to goodwill based on the facts and circumstances existing as of the acquisition date. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to our consolidated statements of earnings in the period that these adjustments are identified. Contingent Consideration Business combinations often include provisions for additional consideration to be transferred to former shareholders based upon the achievement of certain milestones, referred to as contingent consideration. Contingent consideration from product development milestones and sales-based milestone payments on future product sales are included in the purchase price for business combinations. The fair value of the contingent consideration liability is determined as of the acquisition date using estimated or forecasted inputs. These inputs include the estimated amount and timing of projected revenues, probability and timing of milestone achievement, probability of in-process research & development ("IPR&D") achieving regulatory approval, revenue volatility, and the estimated discount rates and risk-free rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period prior to the resolution of the contingency, the contingent consideration liability is remeasured at current fair value, with changes recorded in earnings in the period of remeasurement. The determination of the initial and subsequent fair value of the contingent consideration liability requires significant judgment by management. Changes in any of the inputs not related to facts and circumstances existing as of the acquisition date may result in a significant fair value adjustment, which can impact the results of operations in the period in which the adjustment is made. Changes that are not measurement period adjustments are reported on the consolidated statement of earnings in Contingent consideration (gain) expense . Additional information regarding contingent consideration is included in Note 3, Acquisitions . Accounts Receivable, Net Accounts receivable are reported on the consolidated balance sheets at outstanding amounts due from customers, less an allowance for doubtful accounts, and sales discounts. The Company extends credit without requiring collateral. The Company writes off uncollectible receivables when the customer has had a change in creditworthiness and the likelihood of collection is remote. Payment terms for receivables are based on customary commercial terms and are predominantly less than one year. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk concentrations consist of cash, cash equivalents, marketable securities, and accounts receivable. The counterparties are various corporations, governmental institutions, and financial institutions of high credit standing. 107 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Substantially all of the Company's cash, cash equivalents, and marketable securities are maintained in U.S. government agency debt and debt of well-known, investment grade corporations. Deposits held with banks may exceed the amount of governmental insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and therefore, these bear minimal default risk . The following table shows the percentage of the Company's sales made to and percentage of accounts receivables from wholesalers and distributors representing more than 10% of the Company's total net product sales and more than 10% of the Company's accounts receivables, net: Percentage of Net Product Sales Percentage of Accounts Receivable, net 2021 2020 2019 2021 2020 Customer A 28 % 29 % 32 % 34 % 31 % Customer B 29 % 31 % 32 % 31 % 32 % Customer C 29 % 29 % 34 % 18 % 22 % 86 % 89 % 98 % 83 % 85 % Refer to Note 4, Disaggregated Revenues , for the concentration of net product sales. Inventories Inventories are recorded at the lower of cost or net realizable value, and include materials, labor, direct costs and indirect costs. These are valued using the first-in, first-out method. The Company writes down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value. Expired inventory is destroyed, and the related costs are recognized as Cost of goods sold in the consolidated statement of earnings. Inventories Produced in Preparation of Product Launches The Company capitalizes inventories produced in preparation for product launches when future commercialization of a product is probable and when a future economic benefit is expected to be realized. The determination to capitalize is based on the particular facts and circumstances relating to the product. Capitalization of such inventory begins when the Company determines that (i) positive clinical trial results have been obtained in order to support regulatory approval; (ii) uncertainties regarding regulatory approval have been significantly reduced; and (iii) it is probable that these capitalized costs will provide a future economic benefit in excess of capitalized costs. In evaluating whether these conditions are met, the Company considers the following factors: the product candidate's current status in the regulatory approval process; results from the related pivotal and supportive clinical trials; results from meetings with relevant regulatory agencies prior to the filing of regulatory applications; completion of the regulatory applications; consequent acceptance by the regulatory agency; potential impediments to the approval process such as product safety or efficacy concerns, potential labeling restrictions, and other impediments: historical experience with manufacturing and commercializing similar products as well as the manufacture of the relevant product candidate; and the Company's manufacturing environment, and supply chain in determining logistical constraints that could hamper approval or commercialization. In assessing the economic benefit that the Company is likely to realize, the Company considers the shelf life of the product in relation to the expected timeline for approval; patent related or contractual issues that may prevent or delay commercialization and product stability data of all pre-approval production to assess the adequacy of expected shelf life; viability of commercialization taking into account competitive dynamics in the marketplace and market acceptance; and anticipated future sales and anticipated reimbursement strategies that may prevail with respect to the product, to determine product profit margin. In applying the lower of cost or net realizable value to pre-launch inventory, the Company estimates a range of likely commercial prices based on the pricing of competitive commercial products and pre-launch discussions with managed care providers. 108 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) The Company could be required to write down previously capitalized costs related to pre-launch inventories upon a change in facts and circumstances, including, among other potential factors, a denial or significant delay of approval by regulatory bodies, a delay in commercialization, or other adverse factors. Intangible Assets Intangible assets consist of definite-lived intangible assets: acquired developed technology and product rights, and patent defense costs, and an indefinite-lived intangible asset: acquired IPR&D. Patent defense costs are legal fees that have been incurred in connection with legal proceedings related to the defense of patents. Patent defense costs are charged to expense in the event of an unsuccessful litigation outcome, or if they are deemed to not provide an increase in the value of the patent. Definite-lived intangible assets are carried at cost less accumulated amortization, with amortization calculated on a straight line basis over the estimated useful lives of the assets. The Company evaluates the estimated remaining useful life of its intangible assets annually, or when events or changes in circumstances warrant a revision to the remaining periods of amortization. Acquired IPR&D in a business combination is considered an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts. Upon successful completion of the project, the Company will determine the then-useful life of the intangible asset. This is generally determined as the period over which the substantial majority of the cash flows are expected to be generated. The capitalized amount is then amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. During the period prior to completion or abandonment, the IPR&D asset is not amortized but tested for impairment on an annual basis or when potential indicators of impairment are identified. Impairment of Long-Lived Assets Long-lived assets consist primarily of property and equipment, operating and finance lease assets, and definite-lived intangible assets. The Company assesses the recoverability of its long-lived assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, projected future undiscounted cash flows associated with the asset would be compared to the carrying value of the asset to determine whether the asset's value is recoverable. If impairment is determined, the Company writes down the asset to its estimated fair value and records an impairment loss equal to the excess of the carrying value of the long-lived asset over its estimated fair value in the period at which such a determination is made. Impairment of Indefinite-Lived Intangible Assets For indefinite-lived intangible assets, such as the acquired IPR&D asset, the Company evaluates impairment annually (during the fourth quarter of each fiscal year) or more frequently if impairment indicators exist. The annual evaluation is generally based on an assessment of qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. The Company considers various factors including but not limited to significant or adverse changes in the legal and regulatory environment, adverse clinical trial results, significant trial delays, inability to obtain governmental approval, inability to commercialize a product candidate, the introduction or advancement of competitive products, and product candidates, or other events that indicate it is more likely than not that fair value is less than its carrying value. If the Company is unable to conclude whether the indefinite-lived intangible asset is not impaired after considering the totality of events and circumstances during its qualitative assessment, the Company performs a quantitative assessment by estimating the fair value of the indefinite-lived intangible asset and comparing the fair value to the carrying amount. Evaluating for impairment requires judgment, including evaluating current economic and competitive circumstances, estimating future cash flows, future growth rates, future profitability, and the expected life over which projected cash flows would occur. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, the Company writes down the indefinite-lived intangible asset to its estimated fair value, and an impairment loss equal to the difference between the assets fair value and carrying value is recognized in the consolidated statement of earnings in the period at which such determination is made. 109 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Goodwill and Goodwill Impairment Assessment Goodwill is calculated as the excess of the consideration paid consequent to completing an acquisition compared to the net assets recognized in a business combination. Goodwill represents the future economic benefits from the other acquired assets that could not be individually identified and separately quantified. The Company evaluates goodwill for possible impairment at least annually (during the fourth quarter of each fiscal year), or more often, if and when events and circumstances indicate that goodwill may be impaired. The annual evaluation is generally based on an assessment of qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. This includes but is not limited to significant adverse changes in the business climate, market conditions, or other events that indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the Company is unable to conclude whether the goodwill is not impaired after considering the totality of events and circumstances during its qualitative assessment, the Company performs a quantitative assessment by estimating the fair value of the reporting unit and comparing the fair value to the carrying amount. Evaluating for impairment requires judgment, including identifying reporting units and estimating future cash flows. The Company estimates the fair values of its reporting unit using discounted cash flow models or other valuation models, such as comparative transactions or market multiples. If the carrying amount of the reporting unit exceeds its fair value, the Company writes down the goodwill to the estimated fair value, and an impairment loss equal to the difference is recognized in the consolidated statement of earnings in the period at which such determination is made. Interest Expense Interest expense includes stated interest and the amortization of deferred financing costs and debt discount incurred by the Company in connection with the issuance of $ 402.5 million of 0.625 % Convertible Senior Notes due 2023 (see Note 14). The Company amortizes the deferred financing costs and debt discount over the term of the debt, using the effective interest method. Revenue Recognition The Company recognizes revenue in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company does not adjust revenue for any financing effects in transactions where the Company expects the period between the transfer of the goods or services and collection to be less than one year. No contract assets or liabilities were recorded as of December 31, 2021, or 2020. Revenue from Product Sales The Company's customers are primarily pharmaceutical wholesalers, specialty pharmacies, and pharmaceutical distributors. Customers purchase product to fulfill orders from retail pharmacy chains and independent pharmacies of varying size and purchasing power. The Company recognizes gross revenue when its products are shipped from a third party fulfillment center and physically received by its customers. The Company's customers take control of its products, including title and ownership, upon the physical receipt of its products at their facilities. Customer orders are generally fulfilled within a few days of order receipt, resulting in minimal order backlog. There are no minimum product purchase requirements with our customers. The Company recognizes revenue from product sales in an amount that reflects the consideration the Company expects to ultimately receive in exchange for those goods. Product sales are recorded net of various forms of variable consideration, including: provision for estimated rebates; provision for estimated future product returns; and an estimated provision for discounts. These are collectively considered "sales deductions." As described below, variability in the net transaction price for the Company's products arises primarily from the aforementioned sales deductions. Significant judgment is required in estimating certain sales deductions. In making these estimates, the Company considers: historical experience; product price increases; current contractual arrangements under applicable payor programs; unbilled claims; processing time lags for claims; inventory levels in the wholesale, specialty pharmacy, and retail distribution channel; and product life cycle. The Company adjusts its estimates of revenue either when the most likely amount of consideration it expects to receive changes, or when the consideration becomes fixed. Variable consideration on product sales is only recognized when it is probable that a significant reversal will not occur. 110 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) If actual results in the future vary from our estimates, the Company adjusts its estimates in the period identified. These adjustments could materially affect net product sales and earnings in the period in which the adjustment(s) is recorded. Sales Deductions The Company records product sales net of the following sales deductions: Rebates: Rebates are discounts which the Company pays under either public sector or private sector health care programs. Rebates paid under public sector programs are generally mandated under law, whereas private sector rebates are generally contractually negotiated by the Company with managed care providers. Both types of rebates vary over time. Public sector rebate programs encompass: various Medicaid drug rebate programs; Medicare gap coverage programs; programs covering public health service institutions; and programs covering government entities. All federal employees and agencies purchase drugs under the Federal Supply Schedule. Private sector rebate programs include: contractual agreements with managed care providers, under which the Company pays fees to gain access to that provider's patient drug formulary; and Company-sponsored programs, under which the Company defrays or eliminates patient co-payment charges that the patient would otherwise be obligated to pay to their managed care provider in order to fill their prescription. Rebates are owed when our customer dispenses our product to a patient; i.e., filling a prescription. The accrual balance for rebates consists of the following three components. First, because rebates are generally invoiced and paid in arrears, the accrual balance consists of an estimate of the amount expected to be incurred for prescriptions dispensed in the current quarter. Second, the accrual balance also includes an estimate for known or estimated prior quarters' unpaid rebates, covering those prescriptions dispensed in past quarters but for which no invoice has yet been received. Third, the accrual balance includes an estimate for rebates that will be prospectively owed for prescriptions filled in future quarters. This estimate pertains to a product that has been sold by the Company to wholesalers or distributors and which resides either as wholesaler/distributor inventory or as inventory held at pharmacies. As of the end of the reporting period, this product has not been dispensed to a patient. The Company’s estimates of expected rebate claims vary by program and by type of customer because the period between the date at which the prescription is filled and the date the Company receives and pays the invoice varies substantially. For each of its products, the Company bases its estimates of expected rebate claims on multiple factors, including: historical levels of deductions; contractual terms with managed care providers; actual and anticipated changes in product price; prospective changes in managed care fee for service contracts; prospective changes in co-payment assistance programs; and anticipated changes in program utilization rates; i.e., patient participation rates under each specific program. The Company records an estimated liability for rebates at the time the customer takes title to the product (i.e., at the time of sale to wholesalers/distributors). This liability is recorded as a reduction to gross product sales, and an increase in Accrued product returns and rebates. The liability is recorded as a component of current liabilities on the consolidated balance sheets. The sensitivity of the Company's estimates to subsequent adjustment varies by program and by type of customer. If actual rebates vary from estimated amounts, the Company adjusts the balances of such accrued rebates to reflect actual experience. These adjustments could materially affect the estimated liability balance, net product sales, and earnings in the period in which these adjustments are made. Returns : Sales of the Company's products are not subject to a general right of return. A product that has been used to fill patient prescriptions is no longer subject to any right of return. However, the Company will accept a return of product that is damaged or defective when shipped from its third party fulfillment centers. The Company will also accept a return of expired product six months prior to and up to 12 months subsequent to the product's expiry date for certain products. Expired or defective returned product cannot be re-sold and is therefore destroyed. 111 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) The Company records an estimated liability for product returns at the time the customer takes title to the product (i.e., at time of sale). The liability is reflected as a reduction to gross product sales, and an increase in Accrued product returns and rebates. This liability is recorded as a component of current liabilities on the consolidated balance sheets. The Company estimates the liability for returns primarily based on the actual returns experience for its commercial products. Because the Company's products have a shelf life up to 48 months from the date of manufacture, and because the Company accepts return of product up to 12 months post its expiry date, there is a time lag of several years between the time when the product is sold and the time when the Company may issue credit on the expired product. The Company's returns policy generally permits product returns to be processed at the current wholesaler price rather than at historical acquisition price; hence, the Company's estimated liability for product returns is affected by price increases taken subsequent to the date of sale and prior to its return. At the time the Company adjusts its estimates for product returns, such adjustment affects the estimated liability, product sales, and earnings in the period of adjustment. Those adjustments may be material to our financial results. Sales discounts : Distributors and wholesalers of the Company's pharmaceutical products are generally offered various forms of consideration, including allowances, service fees and prompt payment discounts, for distributing our products. Distributor and wholesaler allowances and service fees arise from contractual agreements and are estimated as a percentage of the price at which the Company sells product to them. In addition, distributors and wholesalers are offered a prompt pay discount for payment within a specified period. Prompt pay discounts are estimated as a percentage of the price at which the Company sells product. The Company accounts for these discounts at the time of sale as a reduction to gross product sales and accounts receivable, net. License Revenue The Company has entered into collaboration agreements to commercialize certain of its products outside of the U.S. Those agreements include the right to use the Company's intellectual property as a functional license and generally include an up-front license fee and ongoing milestone payments upon the achievement of certain specific events. These agreements may also require minimum royalty payments based on sales of products that use the applicable intellectual property. Up-front license fees are recognized once the license has been executed between the Company and its licensee. Milestones are a form of variable consideration recognized when either the underlying events have transpired (i.e., event-based milestone) or when the sales-based targets have been met by the collaborative partner (i.e., sales-based milestone). Both types of milestone payments are nonrefundable. The Company evaluates whether achieving the milestone is considered probable and estimates the amount of the milestone to be included in the transaction price using the most likely amount method. The value of the associated milestone is not included in the transaction price if it is probable that a significant revenue reversal would occur. This estimation is based on management's judgment and may require assessing factors that are outside of the Company's influence, such as: likelihood of regulatory success; availability of third party information; and expected time period until achievement of the event. These factors are evaluated based on the specific facts and circumstances. Event-based milestones are recognized in the period that the related event, such as regulatory approval, occurs. Milestones that are not within the control of the Company, such as approval from regulatory authorities, or where attainment of the specified event is dependent on the success of a third-party, are not considered probable until the specified event occurs. Sales-based milestones are recognized as revenue only when the sales-based target is achieved. There are no guaranteed minimum amounts owed to the Company related to license and collaboration agreements. 112 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Royalty Revenue The Company recognizes noncash royalty revenue for amounts earned pursuant to its royalty agreement with United Therapeutics Corporation (United Therapeutics), based on estimated product sales of Orenitram by United Therapeutics (see Note 4). This agreement includes the right to use the Company's intellectual property as a functional license. In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 15). Consequent to this agreement, the Company recorded a nonrecourse liability related to this transaction and amortizes this liability as noncash royalty revenue. Sales of Orenitram by United Therapeutics result in payments from United Therapeutics to HC Royalty, in accordance with this agreement. The Company also recognizes noncash interest expense related to the nonrecourse liability and accrues interest expense at an estimated effective interest rate (see Note 14). This interest rate is determined based on projections of HC Royalty's rate of return. Royalty revenue also includes cash royalty amounts received from other collaboration partners for the right to use the Company's intellectual property as a functional license. The Company has a royalty arrangement with Takeda Pharmaceutical Company Ltd., based on net product sales of Takeda's product, Mydayis, and with Allergan, based on net product sales of Namzaric. For these arrangements that include sales-based royalties on the licensed intellectual property to which the royalties relate, royalty revenue is only recognized when the underlying product sale has occurred. Sales-based royalties are recorded based on estimated quarterly net sales of the underlying product. Differences between actual results and estimated amounts are adjusted in the period in which they become known, which typically follows the quarterly period in which the estimate is made. To date, actual royalties received have not differed materially from estimates. There are no guaranteed minimum amounts owed to the Company related to any of these royalty revenue agreements. Cost of Goods Sold The cost of goods sold consists primarily of materials; third-party manufacturing costs; freight and distribution costs; direct labor; cost of royalties; cost to write down inventory to net realizable value and manufacturing overhead costs, including quality control and assurance. Research and Development Expenses Research and development expenditures are expensed as incurred. These expenses include: employee salaries, benefits, and share-based compensation; cost of contract research and development services provided by third parties; costs for preclinical and clinical studies; cost of acquiring or manufacturing clinical trial materials; regulatory costs; research facilities costs; depreciation expense and allocated occupancy expenses; and license fees and milestone payments related to in-licensed products and technologies. Acquired IPR&D assets that are used for research and development and have no future alternative use are expensed as incurred in-process research and development. The Company estimates preclinical and clinical trial expenses based on services performed pursuant to contracts with research institutions, clinical investigators, clinical research organizations (CROs), and other service providers that perform services on the Company's behalf. In recording service fees, the Company estimates the cost of those services performed on behalf of the Company during the current period and compares those costs with the cumulative expenses recorded and payments made for such services. As appropriate, the Company accrues additional expense for services that have been delivered or defers nonrefundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from our estimate, the Company adjusts its accrued expenses, or its deferred advance payments, accordingly. If the Company subsequently determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the remaining portion of that advance payment is charged to expense in the period in which such determination is made. 113 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Share-Based Compensation Stock Options The Company recognizes share-based compensation expense over the service period, using the straight-line method. Employee share-based compensation for stock options is determined using the Black-Scholes option-pricing model to compute the fair value of option grants as of their grant date. Forfeitures are accounted for as incurred. The Company uses the following assumptions for estimating the fair value of option grants: • Fair Value of Common Stock —The fair value of the common stock underlying the option grants is determined based on observable market prices of the Company's common stock. • Expected Volatility —Volatility is a measure of the amount by which the Company's share price has historically fluctuated or is expected to fluctuate on a daily basis and is expected to fluctuate (i.e., expected volatility) in the future. • Dividend Yield —The Company has never declared or paid dividends and has no plans to do so in the foreseeable future. Dividend yield is therefore zero . • Expected Term —This is the period of time during which options are expected to remain unexercised. For the years ended December 31, 2021, and 2020, we determined the expected term based on the historical exercise behavior of the stock option plan participants. Options have a maximum contractual term of ten years . • Risk-Free Interest Rate —This is the observed U.S. Treasury Note rate as of the week each option grant is issued, with a term that most closely resembles the expected term of the option. Restricted Stock Units (RSUs) Share-based compensation expense is recorded based on amortizing the fair market value of the RSU as of the date of the grant over the implied service period. RSUs generally vest one year from the date of the grant and are subject to continued service requirements. Forfeitures are accounted for as incurred. Performance Stock Units (PSUs) Performance-Based Awards Share-based compensation expense for performance-based awards is recognized based on amortizing the fair market value of the award as of the grant date over the periods during which the achievement of the performance target is probable . Performance-based awards require certain performance targets to be achieved in order for the award to vest . Vesting occurs on the date of achievement of the performance target. Forfeitures are accounted for as incurred. Market-Based Awards Share-based compensation expense for market-based awards is recognized on a straight-line basis over the requisite service period, regardless of whether the market condition has been satisfied. Market-based PSU awards vest upon the achievement of the performance target. Forfeitures are accounted for as incurred. The Company estimates the fair value of these awards as of the grant date using a Monte Carlo simulation that incorporates option-pricing inputs. This simulation covers the period from the grant date through the end of the derived requisite service period. Volatility as of the grant date is estimated based on historical daily volatility of the Company's common stock over a period of time, which is equivalent to the expected term of the award. The risk-free interest rate is based on the U.S. Treasury Note rate, as of the week, the award is issued, with a duration that most closely resembles the expected term of the award. 114 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Leases The Company determines if an arrangement is a lease considering whether there is an identified asset and the contract conveys the right to control its use. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Right-of-use (ROU) assets and lease liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. The Company calculates the present value of future payments by using an estimated incremental borrowing rate, which approximates the rate at which the Company would borrow, on a secured basis and over a similar term. This rate is estimated based on information available at the commencement date of the lease and may differ for individual leases or portfolios of leased assets. Additionally, for certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and lease liabilities. Lease expense for operating leases is recognized on a straight-line basis over the expected lease term and recognized as an operating cost. Some of the Company's leases include options to terminate prior to the end of the lease term or to extend the lease for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised. The Company's lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes, or other costs. Variable lease costs are expensed as incurred on the consolidated statements of earnings. The Company's lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. Advertising Expense Advertising expense includes the cost of promotional materials and activities, such as printed materials and digital marketing, marketing programs, and speaker programs. The cost of the Company's advertising efforts is expensed as incurred. The Company incurred approximately $ 86.0 million, $ 54.5 million, and $ 40.8 million in advertising expense for the years ended December 31, 2021, 2020, and 2019, respectively. These expenses are recorded as a component of Selling, general and administrative expenses in the consolidated statements of earnings. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are determined based on differences between their financial reporting and tax reporting bases of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. When appropriate, valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized. The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently estimated as the largest amount of the tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities, assuming full knowledge of the position and relevant facts. The Company's policy is to recognize any interest and penalties related to income taxes as income tax expense in the relevant period. The Company's policy is to recognize any interest and penalties related to income taxes as income tax expense in the relevant period. Recently Issued Accounting Pronouncements Accounting Pronouncements Adopted in 2021 ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes - The new standard, issued in December 2019, simplifies the accounting for income taxes. The Company adopted the guidance on January 1, 2021, on a prospective basis. The adoption of the new standard did not have a material impact to the financial statements. 115 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) ASU 2020-01, Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 - The new standard, issued in January 2020, clarifies the interaction of the equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain contracts and purchased options accounted for under Topic 815. The amendment clarifies that an entity can elect to adopt the measurement alternative, which is if an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it should measure the equity security at fair value as of the date that the observable transaction occurred before applying or upon discontinuing the equity method. The adoption of the new standard as of January 1, 2021 did not have a material impact to the financial statements. Accounting Pronouncements Adopted in 2020 ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) - The new standard, issued in July 2016, requires credit losses on financial assets to be measured as the net amount expected to be collected, rather than based on actual incurred losses. For available-for-sale debt securities, the new standard did not revise the definition of impairment. The new standard also eliminated the concept of "other than temporary" from the impairment model for available-for-sale debt securities. Changes to the impairment model include recognition of credit losses on available-for-sale debt securities using the allowance method and limiting the allowance to the amount by which fair value is below amortized cost. The Company adopted the new standard effective January 1, 2020, using the modified retrospective approach. The adoption of the standard did not have a material impact on its consolidated financial statements. ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) - The new standard, issued in August 2018, improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its consolidated financial statements. ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract - The new standard, issued in August 2018, aligns the requirements for capitalizing implementation costs incurred under a service contract for a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or to obtain internal-use software. This includes hosting arrangements that include an internal-use software license. This ASU also requires that the implementation costs of a hosting arrangement under a service contract be expensed over the term of the hosting arrangement, including reasonably certain renewals. The Company adopted the new standard effective January 1, 2020, using the prospective transition approach. The adoption of the standard did not have a material impact on its consolidated financial statements. ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606 - The new standard, issued in November 2018, clarifies when transactions between participants in a collaborative arrangement are within the scope of Topic 606. The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its consolidated financial statements. New Accounting Pronouncements Not Yet Adopted ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity - The new standard, issued in August 2020, simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible debt instruments with cash conversion and beneficial conversion features. ASU 2020-06 eliminates requirements to separately account for liability and equity components of such convertible debt instruments and eliminates the ability to use the treasury stock method for calculating diluted earnings per share for convertible instruments whose principal amount may be settled in whole or in part with equity. Instead, ASU 2020-06 requires (i) the entire amount of the security to be presented as a liability on the balance sheet and (ii) application of the “if-converted” method for calculating diluted earnings per share. This new standard also removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception. This guidance will be effective for fiscal years beginning after December 15, 2021, with early adoption permitted but no earlier than fiscal years beginning after December 15, 2020. 116 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) The Company will adopt the new guidance on January 1, 2022 using the modified retrospective method of transition which allows for a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result, the Company will account for the 2023 Notes wholly as debt and will not separately account for the embedded conversion feature (equity component) of its 2023 Notes in additional paid-in capital. Using the modified retrospective method of transition, the cumulative effect of the accounting change is expected to increase net debt by approximately $ 20.6 million, increase retained earnings by approximately $ 40.6 million, reduce additional paid-in capital by approximately $ 56.2 million and decrease deferred tax liabilities by approximately $ 5.0 million. In addition, the Company will no longer record interest expense on the previously recorded discount for the embedded conversion feature on the 2023 Notes. Due to the adoption, the Company also expects non-cash interest expense related debt discount accretion of the 2023 Notes will be decreased by approximately $ 16.4 million for fiscal year 2022, compared to the debt discount accretion recorded prior to adoption. The Company also expects an increase of approximately 6.8 million shares to be included in its diluted weighted-average shares of common stock outstanding for the purposes of calculating diluted earnings per share. All estimates are based on the balance of the 2023 Notes outstanding as of December 31, 2021 and could change as we continue with our implementation efforts. ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers - The new standard, issued in October 2021, amended guidance on accounting for contract assets and contract liabilities from contracts with customers in a business combination. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606, Revenue from Contracts with Customers , as if the acquiree had initially applied recognition and measurement in their financial statements. This guidance is effective for fiscal years beginning after December 15, 2022 on a prospective basis. Early adoption is permitted. ASU 2021-10, Government Assistance (Topic 832) - The new standard, issued in November 2021, requires the disclosure of information about transactions with a government that are accounted for by applying a grant or contribution model by analogy. This could include various forms of government assistance, but excludes transactions in the scope of specific US GAAP, such as tax incentives accounted for under ASC 740, Income Taxes . For transactions in the scope of the new standard, information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction are required to be disclosed. This guidance is effective for fiscal years beginning after December 15, 2021 on a prospective basis. Early adoption is permitted. The Company will adopt the standard effective January 1, 2022. It is not expected to have a material effect on our consolidated financial statements. 3. Acquisitions Adamas Acquisition On November 24, 2021 (the Adamas Closing Date), the Company completed its purchase of all of the outstanding equity of Adamas, a publicly-held pharmaceutical company, pursuant to the Agreement and Plan of Merger among the Company, Adamas and Supernus Reef, Inc., a wholly owned subsidiary of the Company, dated October 10, 2021 (the Adamas Agreement). On the Adamas Closing Date, Adamas owned two marketed products: GOCOVRI (amantadine) extended release capsules, the first and only U.S. FDA-approved medicine indicated for the treatment of both "off" episodes and dyskinesia in patients with PD receiving levodopa-based therapy and as an adjunctive treatment to levodopa/carbidopa in patients with PD experiencing "off" episodes; and Osmolex ER (amantadine) extended release tablets, approved for the treatment of PD and drug-induced extrapyramidal reactions in adult patients. Adamas also owns the right to receive royalties from Allergan plc for sales of Namzaric (memantine hydrochloride extended release and donepezil hydrochloride) in the United States. The Company paid the Seller $ 400.8 million and two non-tradable contingent value rights (CVRs) each of which represents the contractual right to receive a contingent payment of $ 0.50 per share in cash, less any applicable withholding taxes and without interest, upon the achievement of the applicable milestone (each such amount, a Milestone Payment) in accordance with the terms of a Contingent Value Rights Agreement entered into among the Company and American Stock Transfer & Trust Company, LLC, as rights agent, (CVR Agreement). One Milestone Payment is payable (subject to certain terms and conditions) upon the first occurrence of the achievement of aggregate worldwide net sales of GOCOVRI in excess of $ 150 million during any consecutive 12-month period ending on or before December 31, 2024 (Milestone 2024). Another Milestone Payment is payable (subject to certain terms and conditions) upon the first occurrence of the achievement of aggregate worldwide net sales of 117 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (Continued) GOCOVRI in excess of $ 225 million during any consecutive 12-month period ending on or before December 31, 2025 (Milestone 2025 and, together with Milestone 2024, the Milestones). Each Milestone may only be achieved once. In connection with the two CVRs, the Company recorded a contingent consideration liability of $ 10.3 million as of the date of the acquisition, to reflect the estimated fair value of the contingent consideration. The estimated fair value of the contingent consideration was determined using the Monte Carlo simulation for the sales-based milestones. The fair value measurement of the contingent consideration liability was determined based on significant unobservable inputs and thus represents a Level 3 fair value measurement. The key assumptions considered include the estimated amount and timing of projected cash flows, volatility, estimated discount rates and risk-free interest rate. In each reporting period after the acquisition, the Company will revalue the contingent consideration liability and will record increases or decreases in the fair value of the liability in its consolidated statements of earnings. Changes in fair value will result from changes in actual and projected milestone achievement, as well as changes to forecasts. The inputs and assumptions may not be observable in the market, but reflect the assumptions the Company believes would be made by a market participant. The possible outcomes for the contingent consideration range from $ 0 to $ 50.9 million on an undiscounted basis. The acquisition is being accounted for as a business combination under the acquisition method of accounting, in accordance with ASC 805, Business Combinations . The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. The estimated fair values of the assets acquired and liabilities assumed, including goodwill, have been included in the Company's consolidated financial statements since the Adamas Closing Date. The Company's accounting for this acquisition is preliminary and fair value estimates for the assets acquired and liabilities assumed and the Company's estimates and assumptions are subject to change as the Company obtains additional information for its estimates during the measurement period. During the measurement period, if the Company obtains new information regarding facts and circumstances that existed as of the Adamas Closing Date that, if known, would have resulted in revised estimated values of those assets or liabilities, the Company will accordingly revise its estimates of fair values and purchase price allocation. The effect of measurement period adjustments on the estimated fair value elements will be reflected as if the adjustments had been made as of the Adamas Closing Date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings. The Company expects to finalize its purchase price allocation within one year of the Adamas Closing Date. In addition, the Company continues to analyze and assess relevant information necessary to determine, recognize and record at fair value the assets acquired and liabilities assumed in the following areas: intangible assets, lease assets and liabilities, tax assets and liabilities, and certain existing or potential reserves, including those for legal or contract-related matters. The activities the Company is currently undertaking, include but are not limited to the following: review of acquired contracts and other contract-related and legal matters; review and evaluation of the accounting policies, tax positions, and other tax-related matters. Further, the Company is in the process of obtaining input from third party valuation firms with respect to the fair value of the acquired tangible and intangible assets, and other information necessary to record and measure the assets acquired and liabilities assumed. Accordingly, the preliminary recognition and measurement of assets acquired and liabilities assumed as of Adamas Closing Date are subject to change. 118 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (Continued) The following preliminary purchase price allocation table presents the Company's preliminary estimates of the fair value of assets acquired and liabilities assumed as of the Adamas Closing Date (dollars in thousands): Amount (in thousands) Cash and cash equivalents $ 90,064 Accounts receivable 11,156 Inventories 20,200 Prepaid expenses and other current assets 5,077 Property and equipment 1,254 Intangibles 450,100 Other assets (1) 6,442 Total fair value of assets acquired 584,293 Accounts payable ( 4,592 ) Accrued expenses and other current liabilities (1) ( 8,014 ) Current debt ( 138,315 ) Operating lease liability, long-term (1) ( 5,224 ) Deferred income tax liabilities, net (2) ( 56,588 ) Total fair value of liabilities assumed ( 212,733 ) Total identifiable net assets 371,560 Goodwill 39,553 Total purchase price $ 411,113 Cash consideration paid $ 400,806 Fair value of contingent consideration 10,307 Total purchase price $ 411,113 (1) Acquired operating lease asset was $ 6.4 million and corresponding assumed operating lease liability was $ 7.2 million. Refer to Note 12, Leases , for further discussion of the acquired lease asset and assumed lease liability. (2) Includes tax attributes that are subject to tax limitations. Acquired Inventory The estimated fair value of the inventory was determined using the comparative sales method, which estimated the expected sales price of the product, reduced by all costs expected to be incurred to complete or dispose of the inventory, as well as a profit on the sale. Acquired Intangible Assets The acquired intangible assets include the acquired developed technology and product rights to GOCOVRI and Osmolex ER, as well as the right to receive royalties from Allergan plc for sales of Namzaric. The Company determined the estimated fair values for the acquired intangible assets as of the Adamas Closing Date using the income approach. This is a valuation technique that provides an estimate of fair value of the assets, based on the market participant's expectations of the cash flows that the assets are forecasted to generate. The cash flows were discounted at a rate commensurate with the level of risk associated with its projected cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value. 119 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (Continued) The fair value measurements of the acquired intangible assets were determined based on significant unobservable inputs and thus represents a Level 3 fair value measurement. Some of the more significant inputs and assumptions used in the intangible assets valuation includes: the estimated future cash flows from product sales, the timing and projection of costs and expenses, discount rates and tax rates. Acquired intangible assets consist of developed technology and property rights and are amortized over their estimated useful lives on a straight-line basis. The following table summarizes the preliminary purchase price allocation, and the average remaining useful lives for identifiable intangible assets (dollars in thousands): Estimated Fair Value Estimated Useful Life as of Closing Date (in years) Acquired developed technology and property rights $ 450,100 3.1 - 8.1 Goodwill Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Goodwill is primarily attributable to the anticipated cost synergies, additional growth platforms, and an expanded revenue base with the addition of the assets from the Adamas Acquisition. The goodwill is not expected to be deductible for tax purposes. Acquired Deferred Income Tax Liabilities, net The deferred income tax liabilities, net relates to the difference between the financial statement carrying amount and the tax basis of acquired intangible assets and inventory, partially offset by acquired net operating loss carryforwards and other temporary differences. The acquired federal and state net operating loss carryforwards is reduced by a valuation allowance for amounts that are not expected to be realizable in the future. Refer to Note 11, Income Taxes . Acquisition-related Costs For the year ended December 31, 2021, the Company incurred acquisition-related costs of $ 22.3 million of which the majority were included in the Selling, general and administrative expense in the consolidated statements of earnings. These costs include, $ 15.6 million of employee-related expenses and $ 6.7 million in transaction costs, which primarily consisted of regulatory fees, advertisement fees, financial advisory and legal fees, and other consulting fees , to complete the acquisition. Revenue and Net Earnings of Adamas The operations of Adamas and its subsidiaries have been included in the Company's consolidated statements of earnings for the period subsequent to the Adamas Closing Date, and through December 31, 2021. Total revenues of $ 10.9 million and net loss of $ 18.1 million were recorded for the year ended December 31, 2021. Pro Forma Information The following table presents the unaudited pro forma combined financial information for each of the periods presented, as if the Adamas Acquisition had occurred on January 1, 2020 (dollars in thousands): Year Ended December 31, 2021 2020 (unaudited) Pro forma total revenues $ 663,729 $ 594,858 Pro forma net loss $ ( 28,040 ) $ ( 16,186 ) The unaudited pro forma combined financial information is based on historical financial information and the Company's preliminary allocation of purchase price; therefore, it is subject to subsequent adjustment upon finalization of the purchase price 120 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (Continued) allocation. In order to reflect the occurrence of the acquisition on January 1, 2020, the unaudited pro forma combined financial information reflects the recognition of additional amortization expense on intangible assets and estimated additional cost of products sold related to the inventory step-up adjustment; the estimated reduction in the Company's interest income generated from marketable securities that were liquidated to fund the purchase price of the Acquisition, and the estimated tax impact of the pro forma adjustments. The unaudited pro forma combined financial information also reflects the recognition of non-recurring costs incurred directly as a result of the Acquisition for the year ended December 31, 2021 primarily pertaining to the following: • Acquisition-related costs incurred by the Company of $ 22.3 million and incurred by Adamas of $ 10.5 million; • Stock-based compensation expense of $ 12.7 million for Adamas incurred to accelerate the vesting of certain equity awards under the terms of the Merger Agreement. The unaudited pro forma combined financial information should not necessarily be considered indicative of the results that would have occurred if the acquisition had been consummated on the assumed completion date, nor are they indicative of future results. USWM Acquisition On June 9, 2020 (the USWM Closing Date), the Company completed its acquisition of all the outstanding equity of USWM Enterprises, LLC (USWM Enterprises), a privately-held biopharmaceutical company, pursuant to the Sale and Purchase Agreement with US WorldMeds Partners, LLC (Seller), dated April 28, 2020 (the USWM Agreement). Under the terms of the Agreement, the Company acquired the right to further develop and commercialize APOKYN, XADAGO, and the apomorphine infusion device (SPN-830; the IPR&D asset) in the U.S., and MYOBLOC worldwide (the Products) for an upfront cash payment of $ 297.2 million, subject to working capital adjustments, and the potential for additional contingent consideration payments of up to $ 230 million. The potential $ 230 million in contingent consideration payments includes up to $ 130 million for the achievement of certain SPN-830 regulatory and commercial activities (regulatory and developmental contingent consideration payments) and up to $ 100 million related to future sales performance of the Products (sales-based contingent consideration payments). The regulatory and developmental contingent consideration payments include a $ 25 million milestone due upon the FDA acceptance of the SPN-830 NDA for review. The remaining $ 105 million of the $ 130 million contingent consideration payments include payments upon the FDA's regulatory approval and commercial launch of SPN-830. One of the regulatory milestones has a time-based mechanism for full or partial achievement. The $ 100 million sales-based contingent consideration payments include a $ 35 million milestone due upon achievement of certain U.S. net product sales of APOKYN. The remaining $ 65 million of the $ 100 million sales-based contingent consideration payments relate to the achievement of certain net product sales of the Products in 2022 and 2023. Refer to the contingent consideration discussion in Note 6, Fair Value of Financial Instruments and Contingent Consideration . In the second quarter of 2021 and within one year from the USWM Closing Date, the Company finalized its accounting for the business combination, including the purchase price allocation; the Company recorded measurement period adjustments related to the purchase price consideration, finalization of the accounting for the lease (refer to Note 12, Leases ), the fair values of inventory and intangible assets, and deferred tax liabilities based on refinements to inputs used in the estimates. 121 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (Continued) Purchase Price Consideration Amount Cash consideration $ 306,485 Fair value of contingent consideration 74,800 Total purchase consideration $ 381,285 Cash consideration to Seller - net of cash acquired $ 299,491 The Company paid the Seller $ 297.2 million in cash at the USWM Closing Date. As of December 31, 2021, the Company paid the Seller an additional $ 2.3 million for working capital adjustments on the purchase price consistent with the Agreement resulting in an increase to the original cash consideration paid to the Seller. Of the $ 2.3 million additional payments, $ 1.0 million was incurred in the second quarter of 2021 and the remainder was reported and paid in 2020. Contingent Consideration In addition to the cash paid to the Seller, contingent payments of up to $ 230 million are also due to the Seller upon the achievement of certain milestones related to the development of SPN-830, the IPR&D asset, and sale of the Products. The possible outcomes for the contingent consideration range from $ 0 , if no milestone is achieved, to $ 230 million on an undiscounted basis if all milestones are achieved. The Company initially recorded a contingent consideration liability of $ 115.7 million as of the USWM Closing Date to reflect the estimated fair value of the contingent consideration based on information available at that time. The estimated fair value of the contingent consideration was determined using a Monte Carlo simulation for the sales-based contingent consideration payments and an income approach for the regulatory and developmental contingent consideration payments. The key assumptions considered in estimating the fair value include the estimated probability and timing of milestone achievement, such as the probability and timing of obtaining regulatory approval, discount rate, the estimated revenue volatility and the estimated amount and timing of projected revenues from the Products. Subsequent to the Closing Date, the Company adjusted the contingent consideration fair value based on new information related to the facts and circumstances that existed as of the acquisition date related to the timing of meeting the conditions of the milestone payments that are contingent upon regulatory approval and commercial launch of the acquired IPR&D asset as well as the estimated timing of projected revenues from the Products. As a result, the Company recorded in the fourth quarter of 2020, a measurement period adjustment of $ 40.9 million, which decreased the estimated fair value of the contingent consideration liability as of Closing Date to $ 74.8 million. Refer to the contingent consideration discussion in Note 6, Fair Value of Financial Instruments and Contingent Consideration . 122 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (Continued) Fair Value of Net Assets Acquired The following table presents the total purchase price and the fair value of the assets acquired and liabilities assumed as of the USWM Closing Date (dollars in thousands): Fair Value Cash and cash equivalents 6,994 Accounts receivable, net 18,474 Inventories, net 11,600 Prepaid expenses and other current assets 3,564 Property and equipment, net 454 Operating lease asset (1) 11,029 Intangible assets 355,000 Other assets 340 Total fair value of assets acquired 407,455 Accounts payable ( 2,573 ) Accrued expenses and other current liabilities ( 23,339 ) Operating lease liability (1) ( 11,029 ) Deferred income tax liabilities, net (2) ( 67,192 ) Total fair value of liabilities assumed ( 104,133 ) Total identifiable net assets 303,322 Goodwill 77,963 Total purchase price 381,285 (1) Refer to Note 12, Leases , for further discussion of the acquired lease asset and assumed lease liability. (2) Includes tax attributes that are subject to tax limitations. Acquired Inventory The fair value of the inventory was determined using the comparative sales method, which estimated the expected sales price of the product, reduced by all costs expected to be incurred to complete or to dispose of the inventory, as well as a profit on the sale. Acquired Intangible Assets The acquired intangible assets include the acquired IPR&D asset and the acquired developed technology, and product rights. The Company determined the fair value of the acquired intangible assets as of the USWM Closing Date using the income approach. The fair value measurements of the acquired intangible assets were determined based on significant unobservable inputs and therefore, represent a Level 3 fair value measurement. Some of the more significant inputs and assumptions used in the intangible assets valuation include: the timing and probability of success of clinical and regulatory approvals for the IPR&D asset, the estimated future cash flows from Product sales, the timing and projection of costs and expenses, discount rates and tax rates. 123 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (Continued) The following table summarizes the purchase price allocation, and the average remaining useful lives for identifiable intangible assets (dollars in thousands): Estimated Fair Value Estimated Useful Lives as of Closing Date (in years) Acquired In-process Research & Development $ 124,000 n/a Acquired Developed Technology and Product Rights 231,000 10.5 - 12.5 Total intangible assets $ 355,000 Acquired intangible assets, excluding the acquired IPR&D, will be amortized over their estimated useful lives on a straight-line basis. IPR&D assets are considered indefinite-lived, until the successful completion or abandonment of the associated research and development efforts. Goodwill Goodwill was calculated as the excess of the consideration paid consequent to completing the acquisition, compared to the net assets recognized. Goodwill represents the future economic benefits arising from the other acquired assets, and which could not be individually identified and separately valued. Goodwill is primarily attributable to the additional acquired growth platforms and an expanded revenue base. Goodwill is not deductible for tax purposes. Acquisition-related Transaction Costs Acquisition-related transaction costs, which primarily consisted of regulatory, financial advisory, and legal fees, totaled $ 8.4 million for the year ended December 31, 2020. MDD Enterprises Operations The operations of MDD US Enterprises, LLC ("MDD Enterprises") (formerly USWM Enterprises, LLC) and its subsidiaries have been included in the Company's consolidated statements of earnings for the period subsequent to the USWM Closing Date. The following table summarizes the total revenues for MDD Enterprises (dollars in thousands): December 31, 2021 2020 Net product sales $ 132,134 $ 90,985 The Company is unable to provide the results of operations attributable to MDD US Enterprises, LLC and its subsidiaries as those operations were substantially integrated into our business. Pro forma Information The following table presents the unaudited pro forma combined financial information for each of the periods presented as if the USWM Acquisition had occurred on January 1, 2019 (dollars in thousands): December 31, 2020 2019 (unaudited) Pro forma total revenues $ 583,657 $ 542,807 Pro forma net earnings 133,423 110,842 124 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 4. Disaggregated Revenues The following table summarizes the disaggregation of revenues by product or source (dollars in thousands): Years Ended December 31, 2021 2020 2019 Net product sales Trokendi XR $ 304,817 $ 319,640 $ 295,214 Oxtellar XR 110,708 98,725 88,186 APOKYN 99,233 74,296 — XADAGO 13,387 6,943 — MYOBLOC 19,514 9,746 — Qelbree 9,879 — — GOCOVRI 9,778 — — Osmolex ER 188 — — Total net product sales 567,504 509,350 383,400 Royalty revenues 12,271 11,047 9,355 Total revenues $ 579,775 $ 520,397 $ 392,755 Trokendi XR accounted for more than 50 % of the Company's total net product sales in 2021, more than 60 % in 2020, and more than 70 % in 2019. The Company recognized noncash royalty revenue of $ 9.4 million, $ 8.5 million, and $ 6.9 million for the years ended December 31, 2021, 2020, and 2019, respectively, consequent to the Company's agreement with HC Royalty (see Note 2). During 2020, the Company recorded a $ 10.7 million adjustment to its estimated provision for product returns related to prior year sales. The adjustment, which accounts for the majority of the total adjustments related to prior year net product sales of $ 13.8 million in 2020, was due to unfavorable actual returns experienced in the first quarter of 2020 for discontinued Trokendi XR commercial blister pack configurations, for which all production and distribution ceased in 2017. (These amounts are reflected in the 2020 Trokendi net product sales of $ 319.6 million in the table above.) As a result, the Company changed its estimated provision for product returns, based on the most recent experience. Adjustments related to prior year sales in 2021, 2020 and 2019 were decreased by $ 1.7 million, increased by $ 13.8 million and decreased by $ 0.4 million, respectively, compared to net product sales of $ 567.5 million, $ 509.4 million and $ 383.4 million, respectively. Adjustments related to prior year sales in 2020 of $ 13.8 million included the $ 10.7 million aforementioned adjustment for discontinued Trokendi XR configuration. For the year ended December 31, 2021, revenues recognized from performance obligations related to prior periods (for example, due to changes in transaction price) on royalty revenues were not material in the aggregate. 125 Supernus Pharmaceuticals, Inc. Notes to Financial Statements (Continued) 5. Investments Marketable Securities Unrestricted available-for-sale marketable securities held by the Company are as follows (dollars in thousands): December 31, 2021 December 31, 2020 Corporate and U.S. government agency and municipal debt securities Amortized cost $ 253,301 $ 472,306 Gross unrealized gains 2,349 11,987 Gross unrealized losses ( 238 ) ( 41 ) Total fair value $ 255,412 $ 484,252 The contractual maturities of the unrestricted available-for-sale marketable securities held by the Company are as follows (dollars in thousands): December 31, 2021 Less than 1 year $ 136,246 1 year to 2 years 110,869 2 years to 3 years 8,297 3 years to 4 years — Greater than 4 years — Total $ 255,412 There was no impairment on any available-for-sale marketable securities as of December 31, 2021 and December 31, 2020. Investment in Navitor Development Agreement In April 2020, the Company entered into a Development Agreement with Navitor Pharmaceuticals, Inc. (Navitor). The Company can terminate the Development Agreement upon 30 days' notice. Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) for TRD. The Company will bear all of Phase I and Phase II development costs incurred by either party, up to a maximum of $ 50 million. In addition, the Company will incur certain other research and development support costs. There are certain additional payment amounts which could be incurred by the Company. These costs are contingent upon Navitor achieving defined development milestones. The Company has an option to acquire or license NV-5138 (SPN-820), for which additional payments would be required. In the second quarter of 2020, the Company paid Navitor a one time, nonrefundable, and non-creditable fee of $ 10 million for this option to acquire or license NV-5138 (SPN-820) which was expensed and recorded in Research and development expense in the consolidated statement of earnings. Equity Investment In addition to entering into the Development Agreement, the Company acquired Series D Preferred Shares of Navitor Inc. for $ 15 million in April 2020, representing an approximately 13 % ownership position in Navitor Inc. 126 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Financial Statements (Continued) 5. Investments (Continued) In March 2021, Navitor Inc. underwent a legal restructuring. In the restructuring, Navitor Inc. became a wholly owned subsidiary of a newly formed limited liability company, Navitor LLC, and the outstanding shares of stock in Navitor Inc. were exchanged for units of membership in Navitor LLC having equivalent rights and preferences (Navitor Restructuring). As part of the Navitor Restructuring, the Series D Preferred Shares previously held by the Company were exchanged for Series D Preferred Shares in Navitor LLC. In addition, certain assets that did not relate to NV-5138 (SPN-820) were transferred from Navitor Inc. to a newly formed entity that became a separate, wholly owned subsidiary of Navitor LLC. The Company had determined that Navitor LLC is a VIE. The Company does not consolidate this VIE because the Company lacks the power to direct the activities that most significantly impact the investee's economic performance. Prior to the Navitor Restructuring, the investment was accounted for under the practical expedient allowed for equity securities without readily determinable fair value, which is cost minus impairment plus any changes in observable price changes from an orderly transaction of similar investments in Navitor Inc. Following the legal restructuring and exchange of the preferred shares for member equity units of Navitor LLC, the investment was accounted for under the equity method of accounting due to the Company's ability to exert significant influence and the specific ownership accounts under the new Navitor LLC legal structure, but not control the financial and operating decisions of Navitor LLC. As a result of the change from cost method investment to an equity method investment, the Company was required to measure its investment initially in accordance with the guidance in ASC 805. The majority of the assets and liabilities recorded in Navitor LLC's financial statements represent working capital items and cash that are being used for research and development purposes and are significantly lower than the Company's investment in Navitor LLC, which created a significant basis difference for the Company's investment in the underlying net assets. The Company has determined that substantially all of the fair value of the investment is attributable to a single IPR&D asset. As a result, the investee is not considered a business as defined in ASC 805. In the first quarter of 2021, the $ 15 million investment, which was previously recorded in Other assets in the consolidated balance sheets, was expensed and recorded in Research and development expense in the consolidated statements of earnings. The Company records its share of the results of its investee, a private company, on a quarter lag as the financial information of the investee is not sufficiently and timely available for the Company to apply the equity method of accounting. In December 2021, the investee sold one of its subsidiaries in Navitor LLC and distributed cash to its members, including the Company, in connection with each member's share of the proceeds from the sale. Therefore, the Company received a cash distribution of $ 12.9 million in December 2021 from Navitor LLC in connection with this sale. As the Company's policy is to record our equity method investment on a quarter lag as previously indicated, the Company recorded the cash amount received in Other current liabilities in the consolidated balance sheets as of December 31, 2021. The Company expects to reverse the liability recorded and record a gain based on the financial information of the investee becoming available in the first quarter of 2022. The cash distribution of the Company is classified as a cash inflow from investing activities in the statement of cash flows similar to a return of investment using the cumulative earnings method. The maximum exposure to losses related to the investee is a maximum of approximately $ 50 million in expense for Phase I and Phase II development of NV-5138 (SPN-820); and the cost of other development and formulation activities provided by the Company. The Company has provided no financing to the investee other than the amounts required under the Development Agreement. 6. Fair Value of Financial Instruments and Contingent Consideration The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between unrelated market participants. The Company reports the fair value of assets and liabilities using a three level measurement hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows: • Level 1—Inputs are unadjusted quoted prices in active markets for identical assets. The Company has the ability to access these prices as of the measurement date. Level 1 assets include: cash held at banks; certificates of deposit; 127 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 6. Fair Value of Financial Instruments and Contingent Consideration (Continued) money market funds; investment grade corporate debt securities; and U.S. government agency and municipal debt securities. • Level 2—Level 2 securities are valued using third-party pricing sources that apply relevant inputs and data in their models to estimate fair value. Inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; inputs other than quoted prices, but that are observable for the asset or liability (e.g., interest rates; yield curves); and inputs that are derived principally from or corroborated by observable market data by correlation or by other means (i.e., market corroborated inputs). Level 2 assets include: investment grade corporate debt securities; U.S. government agency and municipal debt securities; other fixed income securities; and SERP (Supplemental Executive Retirement Plan) assets. The fair value of the restricted marketable securities is recorded in Other assets on the consolidated balance sheets. • Level 3—Unobservable inputs that reflect the Company's own assumptions. These are based on the best information available, including the Company's own data. There were no level 3 assets as of December 31, 2021, or December 31, 2020. Financial Assets Recorded at Fair Value The Company's financial assets that are required to be measured at fair value on a recurring basis are as follows (dollars in thousands): Fair Value Measurements as of December 31, 2021 Total Fair Value at December 31, 2021 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Assets: Cash and cash equivalents Cash $ 148,863 $ 148,863 $ — Money market funds 54,571 54,571 — Marketable securities Corporate debt securities 136,246 251 135,995 Long term marketable securities Corporate debt securities 119,166 — 119,166 Other noncurrent assets Marketable securities - restricted (SERP) 630 7 623 Total assets at fair value $ 459,476 $ 203,692 $ 255,784 128 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 6. Fair Value of Financial Instruments and Contingent Consideration (Continued) Fair Value Measurements as of December 31, 2020 Total Fair Value at December 31, 2020 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Assets: Cash and cash equivalents Cash $ 218,550 $ 218,550 $ — Money market funds 70,090 70,090 — Marketable securities Corporate debt securities 133,893 — 133,893 Long term marketable securities Corporate debt securities 350,359 256 350,103 U.S. government agency and municipal debt securities — Other noncurrent assets Marketable securities - restricted (SERP) 547 3 544 Total assets at fair value $ 773,439 $ 288,899 $ 484,540 The carrying amounts of other financial instruments, including accounts receivable, accounts payable, and accrued expenses, approximate fair value due to their short-term maturities. Financial Liabilities Recorded at Fair Value Contingent Consideration The Company's contingent consideration liabilities are measured at fair value on a recurring basis. The Company classifies its contingent consideration liabilities as Level 3 fair value measurements based on the significant unobservable inputs used to estimate fair value. These reflect the inputs and assumptions the Company believes would be made by market participants. Changes in any of those inputs together or in isolation may result in significantly lower or higher fair value measurement. Refer to Note 3, Acquisitions , for further discussion of significant inputs and assumptions used for the valuation of the contingent consideration. During the measurement period, changes in the fair value of contingent consideration related to the USWM Acquisition and Adamas Acquisition are recorded against goodwill if such changes are related to facts and circumstances that existed at the acquisition date. In each reporting period after the acquisition, the Company remeasures the fair value of contingent consideration liabilities and records in its consolidated statements of earnings the increases or decreases in the fair value of the liabilities. In the fourth quarter of 2020, the Company recorded a measurement period adjustment of $ 40.9 million related to the USWM Acquisition. Refer to Note 3, Acquisitions . The Company recorded a $ 6.5 million gain due to the change in fair value of the USWM contingent consideration liability during the year-ended December 31, 2021. The change in fair value of $ 6.5 million was reported on the consolidated statement of earnings in Contingent consideration (gain) expense . The change in fair value was primarily due to the write-down of the sales based contingent consideration liabilities offset by an increase in the estimated fair value of regulatory and developmental milestones due to the passage of time. The Company assessed that these sales-based milestones will not be achieved based on the revised net sales projections. The probability of achieving these milestones were significantly lower compared to prior estimates. The Company updated its projected net sales of the Products based on recent historical sales trend experience. 129 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 6. Fair Value of Financial Instruments and Contingent Consideration (Continued) As mentioned in Note 1, the Company received notice from the FDA on February 18, 2022 of its acceptance for review of the NDA for SPN-830. The regulatory and developmental contingent consideration payments include a $ 25 million milestone due upon the FDA acceptance of the SPN-830 NDA for review, which was paid in the first quarter of 2022. The following table provides the reconciliation of the contingent consideration liabilities balance as of December 31, 2021 (dollars in thousands): Adamas Acquisition USWM Acquisition Total Balance at December 31, 2020 $ — $ 76,700 $ 76,700 Initial estimate of contingent consideration at Closing Date 10,307 — 10,307 Change in fair value recognized in earnings $ — $ ( 6,530 ) $ ( 6,530 ) Balance at December 31, 2021 10,307 70,170 80,477 Reported under the following captions in the consolidated balance sheets: December 31, 2021 December 31, 2020 Contingent consideration, current portion 44,840 30,900 Contingent consideration, long term 35,637 45,800 Total 80,477 76,700 Adamas Acquisition USWM Acquisition Total Regulatory and developmental contingent consideration liabilities $ — $ 70,170 $ 70,170 Sales-based contingent consideration liabilities 10,307 — 10,307 Balance at December 31, 2021 $ 10,307 $ 70,170 $ 80,477 Financial Liabilities Recorded at Carrying Value The following table sets forth the carrying value and fair value of the Company's financial liabilities that are not carried at fair value (dollars in thousands): December 31, 2021 December 31, 2020 Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2) Convertible notes, net $ 379,252 $ 400,236 $ 361,751 $ 383,381 The fair value has been estimated based on actual trading information, and quoted prices, both provided by bond traders. 130 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 7. Goodwill and Intangible Assets, Net The following table sets forth the gross carrying amounts and related accumulated amortization of intangible assets and goodwill as of December 31, 2021 (dollars in thousands): December 31, 2021 December 31, 2020 Description Remaining Weighted- Average Amortization Period (Years) Carrying Amount, Gross Accumulated Amortization Carrying Amount, Net Carrying Amount, Gross Accumulated Amortization Carrying Amount, Net Goodwill $ 117,516 $ — $ 117,516 $ 77,911 $ — $ 77,911 Acquired in-process research and development 124,000 — 124,000 123,000 — 123,000 Intangible assets subject to amortization: Acquired developed technology and product rights 8.73 681,100 ( 35,550 ) 645,550 232,000 ( 10,651 ) 221,349 Capitalized patent defense costs 4.48 43,820 ( 28,677 ) 15,143 43,579 ( 23,586 ) 19,993 Total intangible assets 8.63 $ 848,920 $ ( 64,227 ) $ 784,693 $ 398,579 $ ( 34,237 ) $ 364,342 Goodwill The majority of the increase in goodwill was a result of the Adamas Acquisition. Refer to Note 3, Acquisitions . The remaining increase represents measurement period adjustments recorded in the second quarter of 2021, which related to the finalization of the business combination accounting of the USWM Acquisition. Refer to Note 3, Acquisitions . As of December 31, 2021, there were no identified indicators of impairment. Intangible assets, net Intangible assets include: patent defense costs, which are deferred legal fees incurred in conjunction with defending patents; acquired developed technology and product rights, and acquired IPR&D assets associated with the Company's acquisitions. The Company amortizes intangible assets over their useful lives, except for the acquired IPR&D asset. The acquired IPR&D asset pertains to SPN-830 (apomorphine infusion device) which was acquired as part of the USWM acquisition in 2020. Refer to Note 3 for further discussion of the acquired IPR&D asset. As discussed in Note 1, in February 2022, the Company received notice from the FDA on the acceptance for review of the NDA for SPN-830 and assigned a PDUFA target action date of October 7, 2022. U.S. patents covering Oxtellar XR and Trokendi XR will expire no earlier than 2027. In regards to Trokendi XR, the Company entered into settlement agreements that allow third parties to enter the market by January 1, 2023, or earlier under certain circumstances. As a result of the USWM and Adamas acquisitions, the Company acquired developed technology and product rights for APOKYN, XADAGO, MYOBLOC, GOCOVRI, Osmolex ER and Namzaric. Amortization expense for intangible assets was approximately $ 30.0 million, $ 15.7 million, and $ 5.2 million for the years ended December 31, 2021, 2020, and 2019, respectively. 131 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 7. Goodwill and Intangible Assets, Net (Continued) Anticipated annual amortization expense for intangible assets in 2022 is estimated at $ 82.6 million. Anticipated annual amortization expense for intangible assets from 2023 to 2024 is estimated at $ 79.8 million per year. Anticipated annual amortization expense for intangible assets in 2025 to 2026 is estimated at $ 75.0 million per year. In February 2022, the FDA approved the first generic of Apokyn (apomorphine hydrochloride injection) to treat hypomobility "off" episodes ("end-of-dose wearing off" and unpredictable "on/off" episodes) associated with advanced Parkinson's disease. Refer to Note 17, Subsequent Events. 8. Convertible Senior Notes Due 2023 The 0.625 % Convertible Senior Notes Due 2023 (2023 Notes), issued in March 2018, bear interest at an annual rate of 0.625 %, payable semi-annually in arrears on April 1 and October 1 of each year. The 2023 Notes will mature on April 1, 2023, unless earlier converted or repurchased by the Company. The Notes are being amortized to interest expense at an effective interest rate of 5.41 % over the contractual term of the 2023 Notes. The Company may not redeem the 2023 Notes at its option before maturity. The total principal amount of 2023 Notes is $ 402.5 million. The 2023 Notes were issued pursuant to an Indenture between the Company and Wilmington Trust, National Association, as trustee. The Indenture includes customary terms and covenants, including certain events of default upon which the 2023 Notes may be due and payable immediately. The Indenture does not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness, or the issuance or repurchase of securities by the Company. Noteholders may convert their 2023 Notes at their option only in the following circumstances: (1) during any calendar quarter, if the last reported sale price per share of the Company's common stock for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including the last trading day of the immediately preceding calendar quarter, exceeds 130 % of the conversion price, or a price of approximately $ 77.13 per share on such trading day; (2) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the "measurement period") in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price per share of the Company's common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company's common stock, as specified in the Indenture; and (4) at any time from and including October 1, 2022, until the close of business on the second scheduled trading day immediately before the maturity date. At its election, the Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company's common stock, or a combination of cash and shares of the Company's common stock, based on the applicable conversion rate. The initial conversion rate is 16.8545 shares per $1,000 principal amount of the 2023 Notes, which represents an initial conversion price of approximately $ 59.33 per share, and is subject to adjustment as specified in the Indenture. In the event of conversion, if converted in cash, the holders would forgo all future interest payments, any unpaid accrued interest, and the possibility of further stock price appreciation. If a “make-whole fundamental change," as defined in the Indenture, occurs, then the Company will, in certain circumstances, increase the conversion rate for a specified period of time. If a "fundamental change," as defined in the Indenture, occurs, then noteholders may require the Company to repurchase their 2023 Notes at a cash repurchase price equal to the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest, if any. Contemporaneous with the issuance of the 2023 Notes, the Company also entered into separate privately negotiated convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions) with each of the call spread counterparties. The Company issued 402,500 convertible note hedge options. In the event that shares or cash are deliverable to holders of the 2023 Notes upon conversion at limits defined in the Indenture, counterparties to the convertible note hedges will be required to deliver up to approximately 6.8 million shares of the Company's common stock or to pay cash to the Company in a similar amount as the value that the Company delivers to the holders of the 2023 Notes, based on a conversion price of $ 59.33 per share. 132 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 8. Convertible Senior Notes Due 2023 (Continued) Concurrently with entering into the Convertible Note Hedge Transactions, the Company also entered into separate privately negotiated warrant transactions (collectively, the Warrant Transactions) with each of the call spread counterparties. The Company issued a total of 6,783,939 warrants. The warrants entitle the holder to one share per warrant. The strike price of the Warrant Transactions will initially be $ 80.91 per share of the Company's common stock and is subject to adjustment. The Convertible Note Hedge Transactions are expected to reduce the potential dilution of the Company's common stock upon conversion of the 2023 Notes, and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted 2023 Notes, as the case may be. The Warrant Transactions were intended to partially offset the cost to the Company of the purchased Convertible Note Hedge Transactions; however, the Warrant Transactions could have a dilutive effect with respect to the Company's common stock, to the extent that the market price per share of the Company's common stock, as measured under the terms of the Warrant Transactions, exceeds the strike price of the warrants. The liability component of the 2023 Notes consists of the following (dollars in thousands): December 31, 2021 December 31, 2020 2023 Notes $ 402,500 $ 402,500 Unamortized debt discount and deferred financing costs ( 23,248 ) ( 40,749 ) Total carrying value $ 379,252 $ 361,751 No 2023 Notes were converted as of December 31, 2021, or December 31, 2020. 9. Share-Based Payments Common Stock The holders of the Company's common stock are entitled to one vote for each share of common stock held. Equity Incentive Plan The Company has adopted the Supernus Pharmaceuticals, Inc. 2021 Equity Incentive Plan (2021 Plan) which was approved by the stockholders in June 2021. The 2021 Plan is the successor and replaced the 2012 Equity Incentive Plan, as amended (the 2012 Plan). The 2021 Plan is administered by the Company's Board of Directors and the Company's Compensation Committee of the Board. The 2021 Plan provides for the grant of stock options and certain other equity awards, including: stock appreciation rights (SARs); restricted and unrestricted stock; stock units; performance awards; cash awards; and other awards that are convertible into or otherwise based on the Company's common stock, to the Company's key employees, directors, consultants, and advisors. The maximum number of shares that can be issued under the 2021 Plan shall not exceed 4,951,859 shares, which is the sum of (i) 2,000,000 shares and (ii) the approximately 2,951,859 shares that were available for grant under the 2012 Plan as of April 16, 2021. Option awards are granted with an exercise price equal to the closing price of the Company's common stock as of the grant date. Options and awards granted have a 10 year contractual term. Options and awards granted to employees, consultants and advisors generally vest in four equivalent annual installments, starting on the first anniversary of the grant's date. Options and awards granted to the directors generally vest over a one year term. Employee Stock Purchase Plan The Company has adopted the Supernus Pharmaceuticals, Inc. 2012 Employee Stock Purchase Plan, as amended (the ESPP). The ESPP allows eligible employees the opportunity to acquire shares of the Company's common stock at periodic intervals through accumulated payroll deductions. These deductions are applied at the semi-annual purchase dates of June 30 and December 31 to purchase shares of common stock at a discount. Eligible employees may purchase shares at the lower of 85 % of the fair market value at either the first day of the purchase period or the fair market value at the end of the purchase period. The ESPP provides for the issuance of up to 1.7 million shares of the Company's common stock. The Company records compensation expense related to its ESPP. 133 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 9. Share-Based Payments (Continued) Share-based Compensation Share-based compensation expense is as follows (dollars in thousands): Years Ended December 31, 2021 2020 2019 Research and development $ 2,403 $ 2,431 $ 2,599 Selling, general and administrative 15,507 14,130 12,247 Total $ 17,910 $ 16,561 $ 14,846 The fair value of each option award is estimated on the date of the grant, using the Black-Scholes option-pricing model and the assumptions in the following table: Years Ended December 31, 2021 2020 2019 Fair value of common stock $ 25.09 - $ 30.45 $ 21.13 - $ 23.99 $ 22.99 - $ 37.78 Expected volatility 60.62 % - 61.80 % 61.56 % - 62.27 % 61.36 % - 63.28 % Dividend yield 0 % 0 % 0 % Expected term 5.63 years - 6.56 years 5.72 years - 6.54 years 5.53 years - 6.18 years Risk-free interest rate 0.72 % - 1.30 % 0.27 % - 1.34 % 1.69 % - 2.55 % As of December 31, 2021, the total unrecognized compensation expense was approximately $ 23.8 million. The Company expects to prospectively recognize these expenses over a weighted-average period of 2.54 years. Stock Option and Stock Appreciation Rights The following table summarizes stock option and stock appreciation rights (SAR) activities: Number of Options Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding , December 31, 2019 4,606,559 $ 23.06 6.66 $ 27,716 Granted 1,370,225 $ 23.55 Exercised ( 204,373 ) $ 11.47 Forfeited ( 320,549 ) $ 29.09 Outstanding, December 31, 2020 5,451,862 $ 23.26 6.28 $ 29,877 Granted 1,055,525 $ 28.93 Exercised ( 266,987 ) $ 18.47 Forfeited ( 466,324 ) $ 27.74 Outstanding, December 31, 2021 5,774,076 $ 24.15 5.95 $ 41,530 As of December 31, 2021 Vested and expected to vest 5,774,076 $ 24.15 5.95 $ 41,530 Exercisable 3,651,824 $ 21.29 4.53 $ 37,196 The weighted-average grant date fair value of options granted for the years ended December 31, 2021, 2020, and 2019 were $ 16.25 , $ 13.44 , and $ 21.50 per share, respectively. The aggregate intrinsic value of shares exercised for the years ended December 31, 2021, 2020, and 2019 were $ 2.8 million, $ 2.3 million, and $ 2.4 million, respectively. Proceeds from the option exercise for the years ended December 31, 2020, 2019, and 2018 were $ 4.9 million, $ 2.3 million, $ 1.5 million, respectively. 134 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 9. Share-Based Payments (Continued) The total fair value of the underlying common stock related to shares that vested during the years ended December 31, 2021, 2020, and 2019 were approximately $ 13.9 million, $ 14.1 million, and $ 10.8 million, respectively. Restricted Stock Units The following table summarizes restricted stock unit (RSU) activities: Number of RSUs Weighted- Average Grant Date Fair Value per Share Aggregate Intrinsic Value (in thousands) Aggregate Fair Value (in thousands) Nonvested, December 30, 2019 — $ — Granted 26,055 $ 23.99 Vested — $ — $ — $ — Forfeited — $ — Nonvested, December 31, 2020 26,055 $ 23.99 Granted 21,110 $ 29.61 Vested ( 26,055 ) $ 23.99 $ 146.4 $ 625.1 Forfeited — $ — Nonvested, December 31, 2021 21,110 $ 29.61 The RSUs generally vest one year from the date of grant. As of December 31, 2021, the total unrecognized compensation expense was $ 0.1 million. The Company expects to prospectively recognize these expenses over a weighted-average period of 0.1 years. Performance Stock Units The following table summarizes performance share unit (PSU) activities: Performance-Based Units Market-Based Units Total PSUs Number of PSUs Weighted- Average Grant Date Fair Value per Share Number of PSUs Weighted- Average Grant Date Fair Value per Share Number of PSUs Weighted- Average Grant Date Fair Value per Share Nonvested, December 31, 2019 — — — — $ — Granted 31,250 $ 21.35 15,625 $ 23.41 46,875 $ 22.04 Vested ( 31,250 ) $ 21.35 — $ — ( 31,250 ) $ 21.35 Forfeited — $ — — $ — — $ — Nonvested, December 31, 2020 — $ — 15,625 $ 23.41 15,625 $ 23.41 Granted 95,000 $ 29.74 20,000 $ 28.63 115,000 $ 29.55 Vested ( 40,000 ) $ 29.61 — $ — ( 40,000 ) $ 29.61 Forfeited ( 1,500 ) $ 30.45 — $ — ( 1,500 ) $ 30.45 Nonvested, December 31, 2021 53,500 $ 29.82 35,625 $ 26.34 89,125 $ 28.43 The total fair value of PSUs that vested during the years ended December 31, 2021, 2020, and 2019 were $ 1.2 million, $ 0.7 million, and $ 0 , respectively. The total intrinsic value of PSUs that vested during the years ended December 31, 2021, 2020, and 2019 were $ 0 , $ 0.1 million, and $ 0 , respectively. 135 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 9. Share-Based Payments (Continued) Performance-Based Awards The performance-based PSU awards require certain performance targets to be achieved in order to vest . Vesting is also subject to continued service requirements through the date that the achievement of the performance target is certified. As of December 31, 2021, the t otal unrecognized compensation expense was $ 0.7 million. The Company expects to prospectively recognize these expenses over a weighted-average period of 0.2 years. The total fair value of vested PSUs during the year ended December 31, 2021, was $ 1.2 million. Market-Based Awards The market-based PSU awards are subject to achievement of market-based performance targets in order to vest. There was no unrecognized compensation expense as of December 31, 2021. The Company used a Monte-Carlo Simulation to determine the fair value and expected term of the awards. The expected term of the awards granted in 2021 was 0.9 years. 10. Earnings per Share Basic earnings per share (EPS) is calculated using the weighted-average number of common shares outstanding. Diluted EPS is calculated using the weighted-average number of common shares outstanding, including the dilutive effect of the Company's stock option grants, SARs, RSUs, warrants, employee stock purchase plan (ESPP) awards, and the 2023 Notes, as determined per the treasury stock method. Effect of Convertible Notes and Related Convertible Note Hedges and Warrants In connection with the issuance of the 2023 Notes, the Company entered into Convertible Note Hedge and Warrant Transactions as described further in Note 8, Convertible Senior Notes Due 2023 . The expected collective impact of the Convertible Note Hedge and Warrant Transactions is to reduce the potential dilution that would occur if the price of the Company's common stock was between the conversion price of $ 59.33 per share and the strike price of the warrants of $ 80.91 per share. The 2023 Notes and related Convertible Note Hedge and Warrant Transactions are excluded in the calculation of diluted EPS because inclusion would be anti-dilutive. Specifically, the denominator of the diluted EPS calculation excludes the additional shares related to the 2023 Notes and warrants because the average price of the Company's common stock was less than the conversion price of the 2023 Notes of $ 59.33 per share, as well as less than the strike price of the warrants, $ 80.91 per share. Prior to actual conversion, the Convertible Note Hedge Transactions are not considered in calculating diluted earnings per share, as their impact would be anti-dilutive. In addition to the above described effect of the 2023 Notes and the related Convertible Note Hedge and Warrant Transactions, the Company also excluded the common stock equivalents of the following outstanding stock-based awards in the calculation of diluted EPS because their inclusion would be anti-dilutive. Years Ended December 31, 2021 2020 2019 Stock options, RSUs, PSUs 1,275,114 2,888,785 1,145,446 136 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 10. Earnings per Share (Continued) The following table sets forth the computation of basic and diluted net earnings per share for the years ended December 31, 2021, 2020, and 2019 (dollars in thousands, except share and per share amounts): Years Ended December 31, 2021 2020 2019 Numerator, dollars in thousands: Net earnings $ 53,424 $ 126,950 $ 113,056 Denominator: Weighted average shares outstanding, basic 53,099,330 52,615,269 52,412,181 Effect of dilutive securities: Stock options, RSUs and SARs 1,257,414 1,074,474 1,404,573 Weighted average shares outstanding, diluted 54,356,744 53,689,743 53,816,754 Earnings per share, basic $ 1.01 $ 2.41 2.16 Earnings per share, diluted $ 0.98 $ 2.36 2.10 11. Income Taxes The summary of the income tax expense (benefit) for the years ended December 31, 2021, 2020, and 2019 is as follows (dollars in thousands): Years Ended December 31, 2021 2020 2019 Current Federal $ 16,606 $ 29,893 $ 29,333 State 8,196 11,234 10,930 Deferred Federal ( 1,651 ) 2,200 ( 4,551 ) State ( 3,400 ) ( 1,629 ) ( 1,281 ) Total income tax expense $ 19,751 $ 41,698 $ 34,431 A reconciliation of income tax expense at the U.S. federal statutory income tax rate to annual income tax expense at the Company's effective tax rate is as follows (dollars in thousands): Years Ended December 31, 2021 2020 2019 Income tax expense computed at U.S. federal statutory income tax rate $ 15,367 $ 35,417 $ 30,972 State income taxes 3,088 7,281 7,543 Permanent items 1,465 2,654 1,332 Research and development credits ( 1,016 ) ( 3,602 ) ( 2,071 ) Uncertain income tax position ( 314 ) 348 ( 2,992 ) Change in valuation allowance 250 — — Other 911 ( 400 ) ( 353 ) Income tax expense $ 19,751 $ 41,698 $ 34,431 137 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Financial Statements (Continued) 11. Income Taxes (Continued) The significant components of the Company's deferred income tax assets (liabilities) are as follows (dollars in thousands): As of December 31, 2021 2020 Deferred tax assets: Convertible bond hedge $ 6,910 $ 12,420 Accrued product returns and rebates 19,506 17,529 Accrued compensation and stock based compensation 17,802 13,547 Research and development credit carryforwards 4,448 3,151 Net operating loss carryforwards 126,333 13,164 Operating lease liability 12,146 14,542 Interest limitation 7,860 1,055 Investment 7,819 2,501 Charitable contributions 7,730 1,613 Other 4,256 3,911 Total deferred tax assets 214,810 83,433 Less: valuation allowance ( 70,529 ) ( 582 ) Total deferred tax asset, net of valuation allowance 144,281 82,851 Deferred tax liabilities: Amortization of intangibles ( 199,240 ) ( 79,545 ) Debt discount on 2023 Notes ( 5,671 ) ( 10,190 ) Patent infringement legal costs ( 10,689 ) ( 10,897 ) Operating lease assets ( 9,099 ) ( 10,674 ) Other ( 4,937 ) ( 6,760 ) Total deferred tax liabilities ( 229,636 ) ( 118,066 ) Net deferred tax liabilities $ ( 85,355 ) $ ( 35,215 ) In assessing the realizability of deferred income tax assets, the Company considers whether it is more-likely-than-not that some or all of the deferred income tax assets will not be realized. The ultimate realization of the deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the net operating loss (NOL) and tax credit carryforwards are available. The Company considers projected future taxable income, the scheduled reversal of deferred income tax liabilities, and available tax planning strategies that can be implemented by the Company in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the NOL and credit carryforwards are available to reduce income taxes payable, management had determined it is not more-likely-than-not to realize all such net deferred tax assets. 138 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Financial Statements (Continued) 11. Income Taxes (Continued) A reconciliation of the deferred asset valuation allowance is as follows (dollars in thousands): Years Ended December 31, 2021 2020 2019 Beginning balance $ 582 $ 11 $ 9 Acquisition Accounting (1) 69,697 573 — Additions 250 — 2 Deductions — ( 2 ) — Ending balance 70,529 582 11 (1) Amount comprised principally of acquisitions and purchase accounting adjustments in connect with acquisitions The Company recorded a valuation allowance of $ 70.5 million as of December 31, 2021, of which $ 69.7 million is associated with the Adamas Acquisition. The valuation allowance is primarily related to federal and state net operating losses carryforwards acquired from the Adamas Acquisition that are not expected to be realizable in the future. The Company has NOL and other tax credit carryforwards in several jurisdictions. Due to changes in the Company's ownership, the utilization of net operating loss carryforwards and research and development credit carryforwards, that can be used to offset future taxable income, are subject to annual limits in accordance with Internal Revenue Code (IRC) provisions, as well as similar state provisions. In addition, states may also impose other future limitations through state legislation or similar measures. Despite the NOL carryforwards, the Company may incur higher state income tax expense in the future. As of December 31, 2021, the U.S. federal and state NOL carryforwards amounted to approximately $ 449.3 million ($ 413.7 million related to the Adamas Acquisition) and $ 431.9 million ($ 387.3 million related to the Adamas Acquisition), respectively, and will expire in various years beginning in 2031. For the year ended December 31, 2021, the Company utilized federal NOLs of approximately $ 7.2 million and state NOLs of approximately $ 5.3 million. As of December 31, 2021, the Company has available research and development credit carryforwards of $ 1.6 million, which became available in 2022 and will expire, if unused, starting in 2030. The Company is no longer subject to U.S. Federal income tax examinations for years prior to 2018. Operating loss or tax credit carryforwards generated prior to 2018 may be subject to tax audit adjustment. The Company accounts for uncertain income tax positions pursuant to the guidance in ASC Topic 740, Income Taxes . The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. Some uncertain income tax position liabilities have been recorded against the Company's deferred income tax assets to offset such tax attribute carryforwards and other positions that cannot be offset by tax attributes until liability has been booked. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (dollars in thousands): Years Ended December 31, 2021 2020 2019 Balance as of January 1 $ 5,881 $ 5,978 $ 8,848 Gross increases related to current year tax positions 898 1,027 208 Gross increases related to prior year tax positions — 221 — Gross decreases related to prior year tax positions ( 363 ) — ( 49 ) Lapse of statute of limitations ( 316 ) ( 1,345 ) ( 3,029 ) Balance as of December 31 $ 6,100 $ 5,881 $ 5,978 139 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Financial Statements (Continued) 11. Income Taxes (Continued) The Company recorded $ 0.1 million, $ 0.6 million, and $ 3.0 million of net tax benefit in 2021, 2020 and 2019, respectively, as a result of the expiration of statutes of limitation. The Company also recorded $ 0.3 million, $ 0.3 million, and $ 0.2 million for uncertain tax positions related to research and development tax credits in 2021, 2020, and 2019, respectively, and an additional expense of $ 0.2 million related to a prior year position. The Company does not anticipate a material impact to the financial statements in the next 12 months as a result of uncertain tax positions and expiring statutes of limitation. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act is an emergency economic stimulus package that includes spending and tax incentives to strengthen the U.S. economy and fund a nationwide effort to curtail the effect of the COVID-19 pandemic. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company's financial statements include the removal of certain limitations on the utilization of net operating losses, increasing the ability to deduct interest expense, and amending certain provisions of the previously enacted Tax Cuts and Jobs Act. As of December 31, 2021, the Company expects that these provisions will not have a material impact, as the Company does not have net operating losses that would fall under the provisions of this legislation, nor does it expect interest expense to be limited. The ultimate impact of the CARES Act may differ from this estimate due to changes in interpretations and assumptions, additional guidance that may be issued, and actions the Company may take in response to the CARES Act. The Company will continue to assess the impact that various provisions may have on its business. 12. Leases Operating Leases The Company has operating leases for its headquarters lease and its fleet vehicles. With respect to the fleet vehicle leases, given the volume of individual leases involved in the overall arrangement, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities. The Company also elected to combine the lease and non-lease components for the fleet vehicle and headquarters leases. The Company's headquarters lease commenced on February 1, 2019 and will continue until April 30, 2034, unless earlier terminated in accordance with the terms of the lease. The lease includes options to extend the lease for up to 10 years. On August 23, 2021, the Company entered into an addendum to the original headquarters agreement to lease additional office space, referred to as the Expansion Premises. The Expansion Premises is separate from the lease space in the original lease agreement. The term of the lease with respect to the Expansion Premises commenced on September 1, 2021 and coincides with the lease term per the original lease agreement. As part of the Adamas Acquisition, the Company acquired a lease for office space. Adamas's operating lease for the office space term will continue until April 30, 2025. The lease contains an option to extend the term for one additional five-year period. Contract Manufacturing Lease Contemporaneous with the USWM Acquisition, USWM Enterprises adopted ASC 842, Leases . USWM Enterprises had an existing contract manufacturing agreement with Merz Pharma GmbH & Co. KGaA (Merz), for the manufacture and supply of rimabotulinumtoxinB finished products (Merz Agreement). Pursuant to the Merz Agreement, Merz agreed to provide a dedicated manufacturing facility that included a stand-alone building, dedicated cleanroom suites, dedicated manufacturing, and purification equipment, and filling and packaging production lines (collectively, the manufacturing facility) to manufacture finished products. The Merz Agreement will expire in July 2027 unless the Company and Merz mutually agree to extend the terms. The Merz Agreement may not be terminated for convenience. Under the terms of the agreement, the Company is required to purchase a minimum quantity of finished products on an annual basis. This minimum purchase requirement represents the in-substance fixed contract consideration associated with the dedicated manufacturing facility which the Company accounts for as an embedded lease. 140 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Financial Statements (Continued) 12. Leases (Continued) At the Closing Date of the USWM Acquisition, the Company preliminarily classified the embedded lease as a finance lease and preliminarily elected not to separate the lease and non-lease components. In the second quarter of 2021, the Company finalized its accounting of the USWM Acquisition. During the measurement period, the Company determined the fair market value of rent for the lease components and fair market value of the manufacturing facility associated with the Merz embedded lease. As a result, the Company made an accounting policy election, by class of underlying asset, to not combine lease and non-lease components for the manufacturing facility. A portion of the in-substance fixed contract consideration was allocated to the lease component based on the stand-alone selling price. Accordingly, the Company has finalized and updated the classification of the embedded lease from a finance lease to an operating lease. Refer to Note 3, Acquisitions , for further discussion. Operating and finance lease assets and lease liabilities as reported on the consolidated balance sheets are as follows (dollars in thousands): December 31, Balance Sheet Classification 2021 2020 Assets Operating lease assets Other assets $ 35,365 $ 20,231 Finance lease asset Property and equipment, net — 20,874 Total lease assets $ 35,365 $ 41,105 Liabilities Lease liabilities, current Operating lease liabilities, current portion Accounts payable and accrued liabilities $ 6,477 $ 3,760 Finance lease liability, current portion Other current liabilities — 3,761 Lease liabilities, long term Operating lease liabilities, long term Operating lease liabilities, long term 41,298 28,579 Finance lease liability, long term Other liabilities — 20,235 Total lease liabilities $ 47,775 $ 56,335 The components of operating and finance lease costs are as follows (dollars in thousands): December 31, 2021 2020 Operating lease cost: Fixed lease cost $ 8,929 $ 5,333 Variable lease cost 3,059 2,145 Total $ 11,988 $ 7,478 Finance lease cost: Amortization on finance lease asset $ — $ 1,873 Interest on lease liability — 333 Total $ — $ 2,206 141 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Financial Statements (Continued) 12. Leases (Continued) Supplemental cash flow information related to leases is as follows (dollars in thousands): December 31, 2021 2020 Cash paid for operating leases $ 11,908 $ 6,949 Cash paid for finance lease — 802 Lease assets and tenant receivables obtained for new operating leases 10,868 2,478 Lease assets obtained for new finance lease — 22,747 Weighted average lease term, and weighted average discount rate for operating leases as of December 31, 2021, are as follows: Operating leases Weighted-average remaining lease term (years) 8.9 Weighted-average discount rate 3.71 % Future minimum lease payments under noncancellable operating leases as of December 31, 2021, are as follows (dollars in thousands): Operating Leases Year ending December 31: 2022 $ 7,843 2023 7,733 2024 6,971 2025 5,333 2026 4,626 Thereafter 24,755 Total future minimum lease payments $ 57,261 Less: Imputed interest (1) ( 9,486 ) Present value of lease liabilities $ 47,775 (1) Calculated using the interest rate for each lease. 13. Composition of Other Balance Sheet Items The following details the composition of other balance sheet items (dollars in thousands for amounts in tables): Accounts Receivable As of December 31, 2021, and December 31, 2020, the Company has reduced gross accounts receivable by approximately $ 13.5 million and $ 11.4 million, respectively. Prompt pay discount and contractual service fees, which were originally recorded as reduction to revenues, represents estimated amounts not expected to be paid by our customers. The Company's customers are primarily pharmaceutical wholesalers and distributors and specialty pharmacies. The Company's customers are primarily pharmaceutical wholesalers and distributors, and specialty pharmacies. 142 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 13. Composition of Other Balance Sheet Items (Continued) Inventories Inventories consist of the following (dollars in thousands): December 31, 2021 December 31, 2020 Raw materials $ 7,325 $ 22,208 Work in process 45,711 8,985 Finished goods 32,923 17,132 Total $ 85,959 $ 48,325 In May 2021, the Company launched Qelbree for the treatment of ADHD in pediatric patients 6 to 17 years of age in the U.S. Capitalized pre-launch inventory costs for Qelbree were $ 0 and $ 19.1 million as of December 31, 2021 and December 31, 2020, respectively. Inventories include the acquired inventories from the USWM Acquisition and Adamas Acquisition. Refer to Note 3 for further discussion of the Company's acquisitions. Property and Equipment Property and equipment consists of the following (dollars in thousands): December 31, 2021 December 31, 2020 Lab equipment and furniture $ 12,287 $ 12,526 Leasehold improvements 14,369 15,183 Software 4,776 2,295 Finance lease asset (1) — 22,747 Computer equipment 1,944 2,113 Construction-in-progress 33 — 33,409 54,864 Less accumulated depreciation and amortization ( 16,454 ) ( 17,040 ) Total $ 16,955 $ 37,824 (1) Refer to Note 12, Leases . Depreciation and amortization expense on property and equipment was approximately $ 2.6 million, $ 4.3 million, and $ 1.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. Depreciation and amortization expense of $ 4.3 million in 2020 includes $ 1.9 million of amortization expense associated with the finance lease asset. Refer to Note 12, Leases. As of December 31, 2021, there were no identified indicators of impairment. 143 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 13. Composition of Other Balance Sheet Items (Continued) Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following (dollars in thousands): December 31, 2021 December 31, 2020 Accrued compensation $ 28,068 $ 16,008 Accrued royalties (1) 13,821 13,890 Accrued clinical trial costs (2) 9,125 12,842 Accrued product costs 18,460 9,587 Accrued professional fees 26,728 7,730 Accounts payable 9,331 6,147 Operating lease liabilities, current portion (3) 6,477 3,760 Other accrued expenses 5,673 8,970 Total $ 117,683 $ 78,934 (1) Refer to Note 15, Commitments and Contingencies . (2) Includes preclinical and all clinical trial-related costs. (3) Refer to Note 12, Leases . Accrued Product Returns and Rebates Accrued product returns and rebates consist of the following (dollars in thousands): December 31, 2021 December 31, 2020 Accrued product rebates $ 97,597 $ 96,589 Accrued product returns 35,127 29,603 Total $ 132,724 $ 126,192 Other Liabilities Other liabilities consist of the following (dollars in thousands): December 31, 2021 December 31, 2020 Nonrecourse liability related to sale of future royalties, long term $ 5,977 $ 13,410 Finance lease liability, long term (1) — 20,235 Other liabilities 10,403 9,146 Total $ 16,380 $ 42,791 (1) Refer to Note 12, Leases . 144 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 14. Other (Expense) Income Interest expense consists of the following (dollars in thousands): Years Ended December 31, 2021 2020 2019 Interest expense ( 19,696 ) ( 19,435 ) ( 18,207 ) Interest expense on nonrecourse liability related to sale of future royalties ( 3,727 ) ( 4,319 ) ( 4,500 ) Total $ ( 23,423 ) $ ( 23,754 ) $ ( 22,707 ) Interest expense includes noncash interest expense related to amortization of deferred financing costs and amortization of the debt discount on the 2023 Notes, in the amount of $ 17.5 million, $ 16.6 million, and $ 15.7 million for the years ended December 31, 2021, 2020 and 2019, respectively (see Note 8). Interest income includes interest earned from cash, cash equivalents, and marketable securities of $ 8.8 million, $ 16.0 million, and $ 21.3 million for the years ended December 31, 2021, 2020, and 2019, respectively. 15. Commitments and Contingencies Product Licenses The Company has obtained exclusive licenses from third parties for proprietary rights to support the product candidates in the Company's CNS portfolio. Under these license agreements, the Company may be required to pay certain amounts upon the achievement of defined milestones. If these products are ultimately commercialized, the Company is also obligated to pay royalties to third parties, computed as a percentage of net product sales, for each respective product under a license agreement. Through the USWM Acquisition, the Company acquired licensing agreements with other pharmaceutical companies for APOKYN, XADAGO, and MYOBLOC. The Company is obligated to pay royalties to third parties, computed as a percentage of net product sales, for each of the products under the respective license agreements. The royalty expense incurred for these acquired products is recognized as Cost of goods sold in the consolidated statements of earnings. Royalty Agreement In the third quarter of 2014, the Company received $ 30.0 million pursuant to a Royalty Interest Acquisition Agreement related to the purchase by HC Royalty of certain of the Company's rights under the Company's agreement with United Therapeutics related to the commercialization of Orenitram (treprostinil) Extended-Release Tablets. Full ownership of the royalty rights will revert to the Company if and when a certain cumulative payment threshold is reached (see Note 2, Note 4, and Note 13). USWM Enterprise Commitments Assumed As part of the USWM Acquisition, the Company assumed the remaining commitments of USWM Enterprises and its subsidiaries, which are discussed below. In addition to the annual minimum purchase requirement of MYOBLOC, amounting to an estimated € 3.9 million annually, under the contract manufacturing agreement with Merz for manufacture and supply, USWM Enterprises had an existing license and distribution agreement for XADAGO. This included an annual minimum promotional spend to support the marketing of XADAGO for the first five years of the agreement and will end in 2022. As of December 31, 2021, the total remaining contractual commitment through 2022 is $ 0.3 million. (See Note 3, Acquisitions for further discussion on the USWM Acquisition and Note 12, Leases for further discussion on the finance lease related to the Merz Agreement). In March 2019, MDD US Operations, LLC (formerly US WorldMeds, LLC) and its subsidiary, Solstice Neurosciences, LLC (US) (collectively, the MDD Subsidiaries) entered into a Corporate Integrity Agreement (CIA) with the Office of Inspector General of the U.S. Department of Health and Human Services. Under the CIA, the MDD Subsidiaries agreed to and paid $ 17.5 million to resolve U.S. Department of Justice allegations that it violated the False Claims Act and committed to the establishment 145 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 15. Commitments and Contingencies (Continued) and ongoing maintenance of an effective compliance program. The fine was paid by the MDD Subsidiaries prior to closing of the USWM Acquisition. As part of the USWM Acquisition, we assumed the obligations of the CIA and could become liable for payment of certain stipulated monetary penalties in the event of any CIA violations. In addition, we will continue to incur significant costs through March 2024 to maintain a broad array of processes, policies and procedures necessary to comply with the CIA. Data Breach-related Contingency On November 24, 2021, we announced that we were the target of a ransomware attack. The attack had no significant impact on our business and did not cause any long-term disruption to our operations. Based on the investigation, the Company believes the criminal ransomware groups ("criminal groups") copied certain data from our systems, encrypted certain data on the Company's systems, and then deployed malware designed to impede access to our systems. Thereafter the criminal groups contacted the Company and threatened to publish certain data copied from the Company's systems. Upon detection of the ransomware attack, the Company notified government authorities, engaged third-party cybersecurity experts through our outside counsel, and commenced its recovery process. The Company maintains redundant off-site data backups, which were verified to have not been compromised by the ransomware attack and were utilized to restore the data encrypted by the criminal groups. At this time, the Company has successfully recovered the impacted files and has taken additional steps designed to further protect its networks and files. Furthermore, while the Company has not been the subject of any legal proceedings involving the attack, the likelihood that the Company could be the subject of claims from persons alleging they suffered damages from the incident, or actions by governmental authorities is possible, but the amount of such fines, penalties or costs, if any, cannot be estimated at this time. Claims and Litigation From time to time, the Company may be involved in various claims, litigation and legal proceedings. These matters may involve patent litigation, product liability and other product-related litigation, commercial and other matters, and government investigations, among others. On a quarterly basis, the Company reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated, the Company will accrue a liability for the estimated loss. Because of uncertainties related to claims, legal proceedings and litigation, accruals will be based on the Company's best estimates based on available information. We do not believe that any of these matters will have a material adverse effect on our financial position. The Company may reassess the potential liability related to these matters and may revise these estimates. The process of resolving matters through litigation or other means is inherently uncertain and it is possible that an unfavorable resolution of these matters will adversely affect the Company, its results of operations, financial condition and cash flows, NAMENDA XR/Namzaric Qui Tam Litigation On April 1, 2019, Adamas was served with a complaint filed in the United States District Court for the Northern District of California (Case No. 3:18-cv-03018-JCS) against it and several Allergan entities alleging violations of federal and state false claims acts (FCA) in connection with the commercialization of NAMENDA XR and Namzaric by Allergan. The lawsuit is a qui tam complaint brought by an individual, asserting rights of the Federal government and various state governments. The lawsuit was originally filed in May 2018 under seal, and Adamas became aware of the lawsuit when it was served. The complaint alleges that patents held by Allergan and Adamas covering NAMENDA XR and Namzaric were procured through fraud on the United States Patent and Trademark Office and that these patents were asserted against potential generic manufacturers of NAMENDA XR and Namzaric to prevent the generic manufacturers from entering the market, thereby wrongfully excluding generic competition resulting in artificially high price being charged to government payors. Adamas's patents in question were licensed exclusively to Forest. The complaint includes a claim for damages of "potentially more than $ 2.5 billion dollars," treble damages and statutory penalties. To date the federal and state governments have declined to intervene in this action. This case is currently stayed pending Adamas's and Allergan's interlocutory appeal of the District Court's December 11, 2020 order denying Adamas's and Allergan's motion to dismiss the complaint. The appeal is pending in the United States Court of Appeals for the Ninth Circuit (Case No. 21-80005). Argument was held on January 10, 2022 and no decision has been reached as of the date of this filing. The Company intends to defend itself vigorously. However, the Company can offer no assurances that it will be successful in a litigation. 146 Table of Contents Supernus Pharmaceuticals, Inc. Notes to Consolidated Financial Statements (Continued) 16. Employee Benefit Plan On January 2, 2006, the Company established the Supernus Pharmaceuticals, Inc. 401(k) Profit Sharing Plan (the 401(k) Plan) for its employees under Section 401(k) of the IRC. Under the 401(k) Plan, all full-time employees who are at least 18 years old are eligible to participate in the 401(k) Plan. Employees may participate starting on the first day of the month following employment. Employees may contribute up to the lesser of 90 % of eligible compensation, or the applicable limit, as established by the Code. The Company matches 100 % of a participant's contribution for the first 3 % of their salary deferral and matches 50 % of the next 2 % of their salary deferral. As determined by the Board, the Company may elect to make a discretionary contribution not exceeding 60 % of the annual compensation paid to all participating employees. The Company's contributions to the 401(k) Plan were approximately $ 3.0 million, $ 2.6 million, and $ 2.3 million for the years ended December 31, 2021, 2020, and 2019, respectively. 17. Subsequent Events As discussed on Note 1, Organization and Business , in February 2022, the Company received notice from the FDA of its acceptance for review of the NDA resubmission for SPN-830 (apomorphine infusion device). In February 2022, the FDA approved the first generic of Apokyn (apomorphine hydrochloride injection) to treat hypomobility "off" episodes ("end-of-dose wearing off" and unpredictable "on/off" episodes) associated with advanced PD. This approval is for an application of the drug cartridges only, which are compatible for use with the APOKYN pen, the brand-name pen injector. Patients treated with generic apomorphine hydrochloride will need to separately obtain the APOKYN pen. The Company is in the process of analyzing the impact of the FDA’s approval of a generic apomorphine hydrochloride injection drug cartridge to both the Company’s operations and the corresponding intangible asset. The 2023 Notes include a covenant requiring the Company to provide Noteholders copies of all reports that the Company is required to file with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act within fifteen calendar days after the date that the Company is required to file or furnish such report (after giving effect to all applicable grace periods under the Exchange Act) (such date the “Outside Filing Date”). Although this Annual Report on Form 10-K was not filed with the SEC prior to the Outside Filing Date, it was so filed prior to the sixty-day cure period provided under the terms of the Notes. 147 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.