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Management's Plans as to Continuing as a Going Concern</b></font></p> <p style="FONT-FAMILY: times"><font size="2">The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since inception, the Company has incurred, and continues to incur, significant losses from operations. The Company needs to raise additional capital to continue its business operations as currently planned and to fund deficits in operating cash flows.</font></p> <p style="FONT-FAMILY: times"><font size="2">As described more fully in Note&#160;9, the Company drew down $30.0&#160;million under a secured credit facility (the Facility) during 2011. There is no remaining borrowing capacity under the Facility. As described in Note&#160;10, during 2011, the Company sold all of its equity interest in its wholly-owned subsidiary, TCD, for consideration consisting of a cash receipt of $27.0&#160;million and contingent consideration of $3.0&#160;million to be received in the future if certain criteria are met. As described in Note&#160;11, during 2012 the Company completed an initial public offering, raising approximately $47.6&#160;million, net of expenses and a follow-on common stock offering raising approximately $46.6&#160;million, net of expenses. The Company funded operations during 2012 principally through the use of proceeds from the 2011 draws under the Facility, cash received from the sale of TCD, and proceeds received from the public offerings of its common stock.</font></p> <p style="FONT-FAMILY: times"><font size="2">The Company's current operating assumptions, which reflect management's best estimate of future revenue and operating expenses, indicate that current cash on hand, including the cash proceeds received from the common stock offerings in 2012, should be sufficient to fund operations as currently planned into the fourth quarter of 2013. The Company will need to raise additional capital through either a public offering of its common stock, a private placement offering of equity securities, issuance of a debt instrument, or any combination thereof, to fund deficits in operating cash flows and continue its business operations as currently planned. However, there can be no assurance that such financing will be available to the Company at any given time or available on favorable terms. The type, timing, and terms of financing selected by the Company will be dependent upon the Company's cash needs, the availability of financing sources, and the prevailing conditions in the financial markets.</font></p> <p style="FONT-FAMILY: times"><font size="2">In the event the Company does not gain access to additional funding, the Company will likely revise its commercial plans for Oxtellar XR and Trokendi XR, planned clinical trials, other development activities, capital expenditure plans, and the scale of its operations, until it is able to obtain sufficient financing to resume planned operations or pursue other alternatives. If the Company is required to significantly reduce operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs, these events could have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will be able to adjust the scale of its operations and reduce its operating cash needs to allow operations to continue until additional financing can be secured.</font></p> <p style="FONT-FAMILY: times"><font size="2">These factors could significantly limit the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.</font></p></div> <div style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"> <p style="FONT-FAMILY: times"><font size="2"><b>3. Summary of Significant Accounting Policies</b></font></p> <p style="FONT-FAMILY: times"><font size="2"><b><i>Basis of Presentation</i></b></font></p> <p style="FONT-FAMILY: times"><font size="2">The Company's consolidated financial statements include the accounts of Supernus Pharmaceuticals,&#160;Inc. and Supernus Europe&#160;Ltd., and included the accounts of TCD, its wholly-owned subsidiary, through December&#160;14, 2011, the date that the Company sold 100% of its equity interests in TCD. These are collectively referred to herein as "Supernus" or "the Company." All significant intercompany transactions and balances have been eliminated in consolidation. The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S.&#160;GAAP). The Company currently operates in one business segment.</font></p> <p style="FONT-FAMILY: times"><font size="2">The assets and liabilities related to TCD have identifiable cash flows that are largely independent of the cash flows of other groups of assets and liabilities, and the Company does not have significant continuing involvement with the related products. Accordingly, the remaining assets and liabilities, and the results of operations, related to TCD are presented as discontinued operations for all periods in the accompanying consolidated financial statements. Accrued compensation and interest payable of approximately $1.5&#160;million and $0.1&#160;million, respectively, as of December&#160;31, 2011 previously classified in our consolidated balance sheet as separate line items have been reclassified and included within "accounts payable and accrued expenses" to conform to current period presentation.</font></p> <p style="FONT-FAMILY: times"><font size="2"><b><i>Reverse Stock Split</i></b></font></p> <p style="FONT-FAMILY: times"><font size="2">All share and per share amounts have been retroactively adjusted to give effect to a one-for-four reverse stock split of the Company's common stock effected on April&#160;9, 2012.</font></p> <p style="FONT-FAMILY: times"><font size="2"><b><i>Use of Estimates</i></b></font></p> <p style="FONT-FAMILY: times"><font size="2">The preparation of the financial statements in accordance with U.S.&#160;GAAP requires the Company to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In preparing these consolidated financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, fair value of assets, convertible preferred stock and common stock, stock options and warrants, income taxes, preclinical study and clinical trial accruals and other contingencies. Management bases its estimates on historical experience or on various other assumptions, including information received from its service providers and independent valuation consultants, which it believes to be reasonable under the circumstances. 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Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in consolidated results of operations. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value, which is charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income is recognized as interest income when earned. The cost of securities sold is calculated using the specific identification method. 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The Company has not made, and has no plans to make, contributions to the SERP. The securities can only be used for purposes of paying benefits under the SERP.</font></p> <p style="FONT-FAMILY: times"><font size="2"><b><i>Accounts Receivable</i></b></font></p> <p style="FONT-FAMILY: times"><font size="2">Accounts receivable are reported in the consolidated balance sheets at outstanding amounts, less an allowance for doubtful accounts if necessary. The Company extends credit without requiring collateral. The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a regular basis. An allowance, when needed, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience. 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The Company amortized deferred financing costs associated with the non-recourse notes until December&#160;14, 2011, at which time the non-recourse notes were assumed by the purchaser of TCD (see Note&#160;10). The Company amortizes deferred financing costs associated with term loans over the term of the related debt using the effective interest method. Upon completion of its IPO and upon completion of the follow-on offering, the Company reclassified all previously deferred financing costs related to the offerings as a charge against proceeds received.</font></p> <p style="FONT-FAMILY: times"><font size="2"><b>Impairment of Long-Lived Assets</b></font></p> <p style="FONT-FAMILY: times"><font size="2">Long-lived assets consist primarily of purchased patents and property and equipment. The Company assesses the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the advance payment will be charged to expense in the period that such determination is made.</font></p> <p style="FONT-FAMILY: times"><font size="2"><b>Income Taxes</b></font></p> <p style="FONT-FAMILY: times"><font size="2">The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between 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. 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Instead, the Company will recognize revenue at the time the prescription of our product is filled and delivered to the patient end-user until such time as it can reasonably estimate expected sales deductions and returns, at which time the Company will begin to recognize revenue at the time of shipment of product to the distributors.</font></p> <p style="FONT-FAMILY: times"><font size="2">On February&#160;4, 2013, the Company launched Oxtellar XR, its first commercial product. We anticipate the launch of Trokendi XR to occur during the third quarter of 2013, pending receipt of final approval from the FDA.</font></p> <p style="FONT-FAMILY: times"><font size="2"><i>Milestone Payments</i></font></p> <p style="FONT-FAMILY: times"><font size="2">Milestone payments have been recognized as revenue when the collaborative partner acknowledges completion of the milestone and substantive effort was necessary to achieve the milestone. 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If any of these conditions are not met, the resulting payment would not be considered a substantive milestone, and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and amortized over the appropriate period. The adoption of ASU No.&#160;2010-17 did not have a material impact on the Company's consolidated results of operations, financial position, or liquidity.</font></p> <p style="FONT-FAMILY: times"><font size="2">The Company's recorded milestone revenues were approximately, $0.0, $0.8&#160;million, and $1.1&#160;million during the years ended December&#160;31, 2010, 2011 and 2012, respectively. During the years ended December&#160;31, 2011 and 2012, after the adoption of ASU No.&#160;2010-17, the Company recorded revenues upon achievement of the milestone, as the Company concluded that the milestone was substantive in accordance with its accounting policy.</font></p> <p style="FONT-FAMILY: times"><font size="2"><b><i>Research and Development Costs</i></b></font></p> <p style="FONT-FAMILY: times"><font size="2">Research and development expenditures are expensed as incurred. 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Upon completion of the Company's IPO on May&#160;1, 2012, the lender warrants converted into warrants to purchase 93,750 shares of Common Stock at an exercise price of $4.00 per share. These warrants are recorded as a derivative liability and, as such, the Company reflects the warrant liability at fair value in the consolidated balance sheets. The fair value of this derivative liability is re-measured at the end of every reporting period and the change in fair value is reported in the consolidated statements of operations as other income (expense). On October&#160;5, 2012, a holder exercised warrants to purchase an aggregate of 75,000 shares of common stock via a cashless net share settlement election in accordance with the terms of the agreement, pursuant to which we issued the warrant holder 49,137 shares of common stock. As of December&#160;31, 2011 and December&#160;31, 2012, the fair value of the outstanding warrants was estimated to be approximately $460,000 and $114,000, respectively. The change in fair value of approximately $85,000 and $506,000 has been recorded in other income (expense) in the Company's consolidated statements of operations for the year ended December&#160;31, 2011 and 2012, respectively.</font></p> <p style="FONT-FAMILY: times"><font size="2">In connection with the drawdown of the second $15.0&#160;million under the secured credit facility on December&#160;30, 2011, the Company issued to its lenders warrants to purchase an aggregate of 200,000 shares of the Company's Series&#160;A Preferred Stock at an exercise price of $1.50 per share. The warrants became exercisable immediately and expire on December&#160;30, 2021. Upon completion of the Company's IPO on May&#160;1, 2012, the warrants converted into warrants to purchase 49,999 shares of Common Stock at an exercise price of $5.00 per share. These warrants are recorded as a derivative liability and, as such, the Company reflects the warrant liability at fair value in the consolidated balance sheets. The fair value of this derivative liability is re-measured at the end of every reporting period and the change in fair value is reported in the consolidated statements of operations as other income (expense). On October&#160;5, 2012, a holder exercised warrants to purchase an aggregate of 26,667 shares of common stock via a cashless net share settlement election in accordance with the terms of the agreement, pursuant to which we issued the warrant holder 15,172 shares of common stock. As of December&#160;31, 2011 and 2012, the fair value of the outstanding warrants was estimated to be approximately $237,000 and $137,000, respectively. 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If any of these conditions are not met, the resulting payment would not be considered a substantive milestone, and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and amortized over the appropriate period. The adoption of ASU No.&#160;2010-17 did not have a material impact on the Company's consolidated results of operations, financial position, or liquidity.</font></p> <p style="FONT-FAMILY: times"><font size="2">The Company's recorded milestone revenues were approximately, $0.0, $0.8&#160;million, and $1.1&#160;million during the years ended December&#160;31, 2010, 2011 and 2012, respectively. 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The grant date fair value of options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. For awards that vest based on service conditions, the Company recognizes expense using the straight-line method less estimated forfeitures. The Company has awarded non-vested stock. Prior to the Company's IPO the estimated fair value of these awards was determined at the date of grant based upon the estimated fair value of the Company's common stock. 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Collaboration Agreements</b></font></p> <p style="FONT-FAMILY: times"><font size="2"><b><i>United Therapeutics</i></b></font></p> <p style="FONT-FAMILY: times"><font size="2">The Company has a license agreement with United Therapeutics to use one of its proprietary technologies for an oral formulation of Remodulin for the treatment of pulmonary arterial hypertension and potentially for additional indications. Through December&#160;31, 2012, the Company has received $1.5&#160;million in pre-commercial milestone payments under the agreement. Remaining milestone payments to the Company could total $2.0&#160;million, based on satisfaction of development milestones of oral treprostinil in PAH and up to approximately $4.0&#160;million for the development of additional treprostinil products for a second indication. 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