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Item 9A. Controls and Procedures

2023-03-09 compared with 2022-04-13 · 32 added, 78 removed, 239 unchanged (32% of the section changed)

10 unchanged sentences

generally accepted accounting principles (U.S.

Management Report on Internal Control over Financial Reporting

Management's Report on Internal Control over Financial Reporting

Our management, under the supervision and with the participation of the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

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Under the supervision and with the participation of our management, including our CEO and CFO, and under the oversight of our Board of Directors, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on criteria related to internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework).

As discussed in Note 3 in the Notes to the Consolidated Financial Statements in Part II, Item 8, of this report, the Company completed its acquisition of Adamas Pharmaceuticals, Inc., a publicly traded biopharmaceutical company (Adamas Acquisition) on November 24, 2021.

Management has excluded the acquisition of Adamas Pharmaceuticals, Inc.

(Adamas) from its assessment of the effectiveness of internal control over financial reporting as of December 31, 2021.

The acquired business represented approximately 8% of the total assets (excluding the goodwill and other intangible assets, which are included within the scope of the assessment) and 2% of total revenues as of and for the year ended December 31, 2021.

Based on management's assessment using the criteria set forth above, management concluded that the Company's internal control over financial reporting were not effective as of December 31, 2021 due to the material weaknesses described

Based on management's assessment using the criteria set forth above, management concluded that the Company's internal control over financial reporting was not effective as of December 31, 2022.

The Company disclosed material weaknesses in our internal control over financial reporting as described in our Annual Report on Form 10-K as of December 31, 2021.

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.

On November 24, 2021, the Company disclosed that it was the target of a ransomware attack.

The 2021 ransomware attack resulted in the unauthorized encryption of certain data used by the Company’s legacy enterprise resource planning (“ERP”) system.

In addition, the Company also announced on the same date that it had completed the closing of the Adamas acquisition.

As a result of these events, the Company’s financial and IT operations changed and the circumstances necessitated further re-consideration of the Company’s control environment, risk assessment, information and communication, control monitoring, and control activities.

Specifically, commencing with the fourth quarter of 2021 and continuing into 2022, management was unable to adjust its controls, nor retain sufficient resources to reflect the needs arising from:

(a) the result of the ransomware incident, its effects and significant impact on the following:

i) the Company’s ability to access and reinstate its financial ERP system for an extended period to a new normal state of operation;

ii) the resource needs to rebuild its financial information from backups as a result of the ransomware incident;

iii) additional workload associated with process workflows that were previously automated but are currently manually performed as a result of the ransomware attack.

(b) the Adamas acquisition and the related preliminary purchase price accounting;

These responsibilities were assigned to the finance organization in addition to their historical job responsibilities.

Due to the factors noted above, the Company did not have sufficient resources and as a result, the Company did not adequately perform the following:

(a) assess, redesign and timely evaluate performance of controls over financial reporting risks as a result of existing circumstances;

(b) train, monitor, and supervise newly hired contractors and employees;

In the aggregate, these deficiencies create a reasonable possibility that material misstatements in substantially all financial reporting processes and financial statement accounts in our consolidated financial statements will not be prevented or detected on a timely basis and, therefore, we concluded that the deficiencies represent material weaknesses in our internal control over financial reporting.

KPMG LLP, our independent registered public accounting firm, has audited our consolidated financial statements included in this Annual Report on Form 10-K, and their opinion with respect to the fairness of the presentation of the financial statements is included in this Annual report on Form 10-K.

KPMG has also audited the Company’s internal control over financial reporting as of December 31, 2021.

Their responsibility is to evaluate whether internal controls over financial reporting were designed and operating effectively.

KPMG issued an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2021, which report appears on page 97 in this Annual Report.

During the fourth quarter of 2022, we have identified that material weaknesses still remain specific to 1) the lack of qualified resources and an adequate risk assessment over design and effective operation of controls in our inventory and cost of goods sold processes and 2) the lack of an adequate risk assessment over the design and effective operation of controls that would affect our estimation of accrued product rebates.

Our independent registered public accounting firm KPMG LLP, who audited our consolidated financial statements included in this Annual Report on Form 10-K, issued an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP’s report is included in this Annual Report on Form 10-K.

Remediation Plan

We are committed to remediating the material weaknesses in a timely manner.

Our remediation process includes, but is not limited to, the following:

(a) accelerated implementation of a new ERP to reduce resource constraints and to automate certain processes that are currently being performed manually as a result of the ransomware attack;

(b) reevaluation of all controls, including redesigning controls and control procedures, performing risk assessment procedures, as well as adding new controls as necessary;

(c) continue to actively recruit personnel or hire consultants that have requisite knowledge, experience, and expertise over financial reporting and internal control over financial reporting.

We will continue to evaluate our current and future staffing needs to add personnel and/or create new roles to address our needs;

(d) training/re-training, monitoring, and enhancing communication of control objectives to hired employees and contractors on internal control over financial reporting.

While the audit committee of our board of directors and senior management are closely monitoring the remediation efforts, until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are complete, tested and determined effective, we will not be able to conclude that the

material weaknesses have been remediated.

In addition, we may need to incur incremental costs associated with this remediation, primarily due to the hiring and training of additional personnel, and the improvements in our IT infrastructure.

As previously disclosed in our Quarterly Reports on Form 10-Q as of March 31, 2022, June 30, 2022 and September 30, 2022, we took several steps to remediate the previously disclosed material weaknesses in the Annual Report on Form 10-K as of December 31, 2021, including the following:

(a) Implementation of a new ERP system which went live during the second quarter of 2022;

(b) Performance or risk assessment procedures and reevaluation of control design and control procedures;

(d) Conducted training on internal control over financial reporting to employees and contractors.

We are committed to continuing the remedial steps that are intended to address the material weaknesses in the inventory, cost of goods sold, and accrued commercial product rebates estimation processes.

Our remediation process for inventory and cost of goods sold included but is not limited to reevaluation of controls and control procedures, performing risk assessment procedures as well as adding new controls as necessary.

We have hired new inventory personnel during the fourth quarter of 2022 and redesigned certain controls and control procedures, but there was not a sufficient number of occurrences for certain of those controls to operate to allow management to conclude these controls are properly designed and operating effectively.

Our remediation process for estimating accrued commercial product rebates includes but is not limited to performing additional risk assessment procedures, reevaluation of controls and control procedures, and redesigning controls as necessary.

The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively.

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Our management, including our CEO and CFO, evaluated changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2022.

In 2021, we began the process to integrate the financial reporting systems and processes of the business acquired through the Adamas Acquisition into ours.

As the phased implementation of the integration continues, we are experiencing certain changes to our processes and procedures, which, in turn, result in changes to our internal control over financial reporting.

While management has extended its oversight and monitoring processes that support our internal control over financial reporting, we continue to integrate the operations of Adamas, which may result in additions and changes in our internal controls over financial reporting.

Except for the above noted material weaknesses, remediation activities that have already begun including the implementation of a new ERP, and the integration of Adamas, there were no other changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that occurred during the quarter ended December 31, 2021 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

In the fourth quarter 2022, we have taken additional steps to remediate the previously disclosed material weaknesses in the Annual Report on Form 10-K as of December 31, 2021 by hiring key finance and IT personnel.

Additionally, we completed the process to integrate the operations and financial reporting systems and processes of the business acquired through the Adamas Acquisition into ours.

1) the above noted and previously reported material weaknesses and the related ongoing remediation activities described above, and 2) the integration of Adamas, there were no other changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that occurred during the quarter ended December 31, 2022 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION.

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333-171375, as amended on December 23, 2010).

Lease, dated as of April 19, 1999, by and between ARE Acquisitions, LLC and Shire Laboratories Inc.

(incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, File No.

333-171375, as amended on December 23, 2010).

First Amendment to Lease, dated as of November 1, 2002, by and between ARE Acquisitions, LLC and Shire Laboratories Inc.

(incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, File No.

333-171375, as amended on December 23, 2010).

Second Amendment to Lease, dated as of December 22, 2005, by and among ARE-East Gude Lease, LLC, Shire Laboratories Inc.

and Supernus Pharmaceuticals, Inc.

(incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, File No.

333-171375, as amended on December 23, 2010).

Third Amendment to Lease, dated as of November 24, 2010, by and between ARE-East Gude Lease, LLC and the Registrant (successor-in-interest to Shire Laboratories Inc.) (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, File No.

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333-171375, as amended on March 16, 2012).

10.12 †* Exclusive Option and License Agreement, dated as of April 27, 2006, by and between the Registrant and Afecta Pharmaceuticals, Inc.

(incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, File No.

333-171375, as amended on March 16, 2012).

10.12 †* Purchase and Sale Agreement, dated as of June 9, 2006, by and between the Registrant and Rune Healthcare Limited.

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1, File No.

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and the Company (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on February 7, 2013, File No., 001-35518).

Lease Agreement, dated February 6, 2013, by and among ARE-1500 East Gude, LLC and the Company (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the period ended December 31, 2012, filed on March 15, 2013, File No.

Commercial Supply Agreement dated December 15, 2012 by and among Catalent Pharma Solutions, LLC and the Company (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on August 21, 2013, File No.

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and Jack Khattar (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on August 11, 2014, File No.

Fourth Amendment to Lease Agreement, dated October 20, 2014, by and between ARE-Acquisitions, LLC and Supernus Pharmaceuticals, Inc.

(incorporated by reference to Exhibit 10.1 to the Form 8-K filed on October 24, 2014, File No.

First Amendment to Lease Agreement, dated October 20, 2014, by and between ARE-1500 East Gude, LLC and Supernus Pharmaceuticals, Inc.

(incorporated by reference to Exhibit 10.2 to the Form 8-K filed on October 24, 2014, File No.

Second Amendment to Amended and Restated Employment Agreement, dated March 2, 2016, by and between Supernus Pharmaceuticals, Inc.

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Exclusive Supply of Pens, effective September 23, 2019 (incorporated by reference to Exhibit 10.5 to the Form 10-Q filed on August 17, 2020, File No.

10.58 ††+* Offer Letter to James P.

Kelly (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on October 5, 2020, File No.

10.59 +* Executive Retention Agreement, dated October 12, 2020, by and between James P.

Kelly and Supernus Pharmaceuticals, Inc.

(incorporated by reference to Exhibit 10.2 to the Form 8-K filed on October 5, 2020, File No.

10.60 ††+* Consulting Agreement, made as of November 18, 2020, by and between Supernus Pharmaceuticals, Inc.

and Gregory S.

Patrick (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on November 19, 2020, File No.

10.61 ††+* Consulting Agreement, made as of December 31, 2020, by and between Supernus Pharmaceuticals, Inc.

and Stefan K.F.

Schwabe (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on November 19, 2020, File No.

Offer Letter to Timothy C.

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on November 2, 2017, File No.

10.71 ††** Settlement Agreement, dated as of December 31, 2022, by and between Supernus Pharmaceuticals, Inc., Zydus Pharmaceuticals (USA) Inc.

and Zydus Lifesciences Limited.

10.72 ††* Credit Line Agreement between UBS Bank USA and Supernus Pharmaceuticals, Inc.

dated as of February 8, 2023 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on February 14, 2023, File No.

Code of Ethics (incorporated by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the period ended December 31, 2012, filed on March 15, 2013, File No.

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President and Chief Executive Officer

April 13, 2022

March 9, 2023

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and the dates indicated below:

Signature Title Date

KHATTAR President and Chief Executive Officer and Director (Principal Executive Officer) April 13, 2022

KHATTAR President and Chief Executive Officer and Director (Principal Executive Officer) March 9, 2023

/s/ TIMOTHY C.

DEC Senior Vice-President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) April 13, 2022

DEC Senior Vice-President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) March 9, 2023

/s/ CHARLES W.

NEWHALL, III.

Director and Chairman of the Board April 13, 2022

Director and Chairman of the Board March 9, 2023

/s/ CARROLEE BARLOW, M.D., PH.D.

Director April 13, 2022

Director March 9, 2023

/s/ GEORGES GEMAYEL, PH.D.

Director April 13, 2022

Director March 9, 2023

/s/ FREDERICK M.

HUDSON Director April 13, 2022

HUDSON Director March 9, 2023

SIEBERT, PH.D.

Director April 13, 2022

Director March 9, 2023

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

What changed 10-K

Item 9A. Controls and Procedures