On March 25, 2022, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Jazz, pursuant to which the Company will acquire Sunosi from Jazz (the “Acquisition”). The Company accounted for the Acquisition as a business combination using the acquisition method of accounting. The acquisition of Sunosi will occur in two separate closings. The sale and purchase of Specified Initial Assets as defined and contemplated by the Purchase Agreement occurred on May 9, 2022 (“Initial Closing”), following the satisfaction or waiver of the closing conditions under the Purchase Agreement. The sale and purchase of Specified Ex-U.S. Assets contemplated by the Purchase Agreement is expected to occur during the fourth quarter of 2022 (“Final Closing” or “Ex-U.S. Closing”).

Under the terms of the Asset Purchase Agreement, the Company received from Jazz worldwide commercial, development, manufacturing, and intellectual property rights to Sunosi, except for certain Asian markets. Jazz received from the Company a total upfront payment of $53 million. In addition, Jazz will receive a high single-digit royalty on the Company's U.S. net sales of Sunosi in the current indication, and a mid single-digit royalty on the Company's U.S. net sales of Sunosi in future indications. The Company also assumed the commitments of Jazz to SK Biopharmaceuticals (“SK)” and Aerial Biopharma (“Aerial”). SK is the originator of Sunosi and retains rights in 12 Asian markets, including China, Korea, and Japan. In 2014, Jazz acquired from Aerial worldwide rights to Sunosi excluding those Asian markets as stated previously. The assumed commitments to SK and Aerial include single-digit tiered royalties based on the Company's sales of Sunosi, and additionally, the Company is committed to pay up to $165 million based on revenue milestones and $1 million based on development milestones. The Company financed the transaction via its existing $300 million term loan facility with Hercules Capital, Inc.

In conjunction with the Acquisition, the Company incurred approximately $0.5 million in transaction costs, which were expensed as selling, general, and administrative expense in the consolidated statement of operations during the six months ended June 30, 2022.

Our Consolidated Statement of Operations for the three and six months ended June 30, 2022, include $8.8 million of Product sales and $4.6 million of Net Loss associated with the result of operations of Sunosi from the acquisition date to June 30, 2022.

Preliminary purchase consideration consisted of the following:



Cash at settlement	$	53,000,000
Fair value of contingent consideration		36,140,407
Total	$	89,140,407

The preliminary allocation of the fair value of the Sunosi acquisition is shown in table below:


	Estimated fair value
Inventory	$	10,601,000
Other current assets		3,551,000
Developed technology		63,800,000
Goodwill		11,897,407
Accrued expenses and other current liabilities		(709,000	)
Total	$	89,140,407

The above allocation of the purchase price is based upon certain preliminary valuations and other analyses that have not been finalized as of the date of this filing. As such, the purchase price amount and allocations for this transaction are preliminary estimates including developed technology, goodwill and contingent consideration, which may be subject to change within the measurement period.

The net assets were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations, and appropriate discount rates.

Inventories acquired included raw materials, work in process and finished goods for Sunosi. Inventories were recorded at their estimated fair values categorized as Level 3. The fair value of finished goods was determined based on the estimated selling price, net of selling costs and a margin on the selling activities. The fair value of work in process was determined based on estimated selling price, net of selling costs and costs to complete the manufacturing, and a margin on the selling and

manufacturing activities. The fair value of raw materials was estimated to equal the replacement cost. A step-up in the value of inventory of $1.1 million was originally recorded in connection with the Acquisition.

Other current assets acquired were sample inventory and the rebates for Sunosi sales by the Company after the Initial Closing to be covered by Jazz.

Intangible assets include acquired developed technology. The fair value of the acquired developed technology asset was determined by applying the income approach, which recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales projections and estimated direct costs, using a discount rate of 43.5 % that reflects the return requirements of the market. This intangible asset is being amortized over an estimated useful life of 10 years.

Goodwill is considered an indefinite-lived asset and relates primarily to intangible assets that do not qualify for separate recognition, such as the assembled workforce and synergies between the entities. Goodwill of $ 11.9 million was established as a result of the Acquisition. The Company expects that the entire amount of the purchase price allocated to goodwill will be deductible for U.S. income tax purposes over a 15-year period.

Accrued expense and other current liabilities acquired were the Company's assumed sales returns liability for Sunosi after the transaction close date related to Jazz sales prior to the Initial Closing

The following unaudited pro forma summary presents consolidated information of the Company, including Sunosi, as if the business combination had occurred on January 1, 2021, the earliest period presented herein:


	Six Months Ended
	June 30,			June 30,
	2022			2021
Net revenues	$	32,848,000		$	21,328,000
Net Loss		(108,332,000	)		(169,365,000	)

These pro forma results are illustrative only and not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.