UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

For the Quarterly Period Ended March 31, 2020

OR

Commission File No. 001-33057

CATALYST PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (305) 420-3200

Securities registered pursuant to Section 12(b) of the Act:

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 103,415,365 shares of common stock, $0.001 par value per share, were outstanding as of May 7, 2020.

CATALYST PHARMACEUTICALS, INC.

INDEX

PART I. FINANCIAL INFORMATION

2

CATALYST PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

3

CATALYST PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

4

CATALYST PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

For the three months ended March 31, 2020 and 2019

The accompanying notes are an integral part of these consolidated financial statements.

5

CATALYST PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

6

CATALYST PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Catalyst Pharmaceuticals, Inc. and subsidiary (collectively, the “Company”) is a biopharmaceutical company focused on developing and commercializing innovative therapies for people with rare debilitating, chronic neuromuscular and neurological diseases, including Lambert-Eaton Myasthenic Syndrome (LEMS), Anti-MuSK antibody positive myasthenia gravis (MuSK-MG), and Spinal Muscular Atrophy (SMA) Type 3.

On November 28, 2018, the U.S. Food and Drug Administration, or FDA, granted approval of Firdapse^® for the treatment of adults with LEMS (ages 17 and above). On January 15, 2019, the Company launched its first product, Firdapse^®, in the United States for the treatment of adults with LEMS.

Since inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets, raising capital, and selling its product. The Company incurred operating losses in each period from inception, and started reporting operating income during the year ended December 31, 2019. The Company has been able to fund its cash needs to date through several public and private offerings of its securities and from revenues from its product sales. See Note 11 (Stockholders’ Equity).

Capital Resources

While there can be no assurance, based on currently available information, the Company estimates that it currently has sufficient resources to support its operations for at least the next 12 months from the issuance date of this Form 10-Q.

The Company may raise required funds in the future through public or private equity offerings, debt financings, corporate collaborations, governmental research grants or other means. The Company may also seek to raise new capital to fund additional product development efforts, even if it has sufficient funds for its planned operations. Any sale by the Company of additional equity or convertible debt securities could result in dilution to the Company’s current stockholders. There can be no assurance that any required additional funding will be available to the Company at all or available on terms acceptable to the Company. Further, to the extent that the Company raises additional funds through collaborative arrangements, it may be necessary to relinquish some rights to the Company’s drug candidates or grant sublicenses on terms that are not favorable to the Company. If the Company is not able to secure additional funding when needed, the Company may have to delay, reduce the scope of, or eliminate one or more research and development programs, which could have an adverse effect on the Company’s business.

Risks and Uncertainties

There are many uncertainties regarding the novel coronavirus (COVID-19) pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how the pandemic is impacting its patients, employees, suppliers, vendors, business partners, clinical trials and distribution channels. The Company is unable to predict the impact that COVID-19 will have on its financial position and operating results in future periods due to numerous uncertainties. The Company will continue to assess the evolving impact of the COVID-19 pandemic and make adjustments to its operations as necessary.

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In the opinion of management, the accompanying unaudited interim consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of the dates and for the periods presented. Accordingly, these consolidated statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2019 included in the 2019 Annual Report on Form 10-K filed by the Company with the SEC. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for any future period or for the full 2020 fiscal year.

Short-Term Bond Fund

The Company previously owned a short-term bond fund that was classified as trading securities. Trading securities are recorded at fair value based on the closing market price of the security. For trading securities, the Company recognizes realized gains and losses and unrealized gains and losses to earnings. At March 31, 2020 and December 31, 2019, there were no investments classified as trading securities, as the Company sold its interest in the short-term bond fund in 2019. There were no sales of trading securities for the three months ended March 31, 2020. Realized losses on trading securities during the three months ended March 31, 2019 were $4,980. Unrealized gain on trading securities was $0 and $52,741, respectively, for the three months ended March 31, 2020 and March 31, 2019, and is included in other income, net in the accompanying consolidated statements of operations.

8

U.S. Treasuries

U.S. Treasuries are classified as available-for-sale securities. The Company classifies available-for-sale securities with stated maturities of greater than three months and less than one year as short-term investments. Available-for-sale securities with stated maturities greater than one year are classified as non-current investments in its consolidated balance sheets. The Company records available-for-sale securities at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses are included in other income, net and are derived using the specific identification method for determining the cost of securities sold. Interest income is recognized when earned and is included in other income, net in the consolidated statements of operations and comprehensive income (loss). The Company recognizes a charge when the declines in the fair value below the amortized cost basis of its available-for-sale securities are judged to be other-than-temporary. The Company considers various factors in determining whether to recognize an other-than-temporary charge, including whether the Company intends to sell the security or whether it is more likely than not that the Company would be required to sell the security before recovery of the amortized cost basis. The Company has not recorded any other-than-temporary impairment charges on its available-for-sale securities. See Note 3 (Investments).

Products that have been approved by the FDA or other regulatory authorities, such as Firdapse^®, are also used in clinical programs to assess the safety and efficacy of the products for usage in treating diseases that have not been approved by the FDA or other regulatory authorities. The form of Firdapse^® utilized for both commercial and clinical programs is identical and, as a result, the inventory has an “alternative future use” as defined in authoritative guidance. Raw materials associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use”.

The Company evaluates for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance, and patient usage.

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Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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11

To determine revenue recognition for arrangements that are within the scope of Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers (“Topic 606”), the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for product revenue, see Product Revenue, Net below.

The Company also may generate revenues from payments received under a collaborative agreement. Collaborative agreement payments may include nonrefundable fees at the inception of the agreements, milestone and event-based payments for specific achievements designated in the collaborative agreements, and/or royalties on sales of products resulting from a collaborative arrangement. For a complete discussion of accounting for collaborative arrangements, see Revenues from Collaborative Arrangement below.

Product Revenue, Net: The Company sells Firdapse^® to the Customer (its exclusive distributor) who subsequently resells Firdapse^® to both a small group of SPs who have exclusive contracts with the Company to distribute the Company’s products to patients and potentially to medical centers or hospitals on an emergency basis. In addition to the distribution agreement with its Customer, the Company enters into arrangements with health care providers and payors that provide for government-mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products.

The Company recognizes revenue on product sales when the Customer obtains control of the Company’s product, which occurs at a point in time (upon delivery). Product revenue is recorded net of applicable reserves for variable consideration, including discounts and allowances. The Company’s payment terms range between 15 and 30 days.

Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods, and are recorded in cost of sales.

If taxes should be collected from the Customer relating to product sales and remitted to governmental authorities, they will be excluded from revenue. The Company expenses incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that the Company would have recognized is one year or less. However, no such costs were incurred during the three months ended March 31, 2020.

During the three months ended March 31, 2020 and 2019, all of the Company’s sales were to its Customer.

Reserves for Variable Consideration: Revenue from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customer, payors, and other indirect customers relating to the Company’s sale of its products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a customer).

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These estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. The Company’s analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of March 31, 2020 and, therefore, the transaction price was not reduced further during the three months ended March 31, 2020. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Trade Discounts and Allowances: The Company provides its Customer with a discount that is explicitly stated in its contract and is recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company receives sales order management, data and distribution services from the Customer. To the extent the services received are distinct from the sale of Firdapse^® to the Customer, these payments are classified in selling, general and administrative expenses in the Company’s consolidated statement of operations and comprehensive income (loss). However, if the Company has determined such services received to date are not distinct from the Company’s sale of products to the Customer, these payments have been recorded as a reduction of revenue within the consolidated statement of operations and comprehensive income (loss) through March 31, 2020, as well as a reduction to accounts receivable, net on the consolidated balance sheets.

Funded Co-pay Assistance Program: The Company contracts with a third-party to manage the co-pay assistance program intended to provide financial assistance to qualified commercially-insured patients. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with Firdapse^® that has been recognized as revenue, but remains in the distribution channel at the end of each reporting period. These payments are considered payable to the Customer and the related reserve is recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities in the consolidated balance sheets.

Product Returns: Consistent with industry practice, the Company offers the SPs and its distributor limited product return rights for damaged and expiring product, provided it is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. The Company estimates the amount of its product sales that may be returned by its Customer and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company has an insignificant amount of returns to date and believes that returns of its products will continue to be minimal.

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Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to the Customer who directly purchases the product from the Company. The Customer charges the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue, net and accounts receivable, net. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by the Customer, and the Company generally issues credits for such amounts within a few weeks of the Customer’s notification to the Company of the resale. Reserves for chargebacks consist principally of chargebacks that the Customer has claimed, but for which the Company has not yet issued a credit.

Government Rebates: The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

Bridge and Patient Assistance Programs: The Company provides free Firdapse^® to uninsured patients who satisfy pre-established criteria for either the Bridge Program or the Patient Assistance Program. Patients who meet the Bridge Program eligibility criteria and are transitioning from investigational product while they are waiting for a coverage determination, or later, for patients whose access is threatened by the complications arising from a change of insurer may receive a temporary supply of free Firdapse^® while the Company is determining the patient’s third-party insurance, prescription drug benefit or other third-party coverage for Firdapse^®. The Patient Assistance Program provides free Firdapse^® for longer periods of time for those who are uninsured or functionally uninsured with respect to Firdapse^® because they are unable to obtain coverage from their payer despite having health insurance, to the extent allowed by applicable law. The Company does not recognize any revenue related to these free products and the associated costs are classified in selling, general and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss).

Revenues from Collaborative Arrangement: The Company has entered into a collaboration agreement for the further development and commercialization of generic Sabril^® (vigabatrin) tablets. Pursuant to the terms of this agreement, collaborator could be required to make various payments to the Company, including upfront license fees, milestone payments based on achievement of regulatory approvals, and royalties on sales of products resulting from the collaborative agreement.

Nonrefundable upfront license fees are recognized upon receipt as persuasive evidence of an arrangement exists, the price to the collaborator is fixed or determinable and collectability is reasonably assured.

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The collaborative agreement provides for a milestone payment upon achievement of development and regulatory events. The Company accounts for milestone payments in accordance with the provisions of Accounting Standards Update (ASU) No. 2010-17, Revenue Recognition – Milestone Method (“Milestone Method of Accounting”). The Company recognizes consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:

A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the vendor.

The Company believes that achievement of the milestone will be substantive and there will be no substantive uncertainty once the milestone is achieved.

Since the Company will receive royalty reports 60 days after quarter end, royalty revenue from sales of collaboration products by our collaborator will be recognized in the quarter following the quarter in which the corresponding sales occurred. As of March 31, 2020 and 2019, there was no royalty revenue from sales of the collaborative product.

Refer to Note 7 (Collaborative Arrangement), for further discussion on the Company’s collaborative arrangement.

15

The Company sells its product in the United States through an exclusive distributor (its Customer) to specialty pharmacies. Therefore, its distributor and specialty pharmacies account for all of its trade receivables and net product revenues. The creditworthiness of its Customer is continuously monitored, and the Company has internal policies regarding customer credit limits. The Company estimates an allowance for expected credit loss primarily based on the credit worthiness of its Customer, historical payment patterns, aging of receivable balances and general economic conditions.

The Company currently has a single product with limited commercial sales experience, which makes it difficult to evaluate its current business, predict its future prospects and forecast financial performance and growth. The Company has invested a significant portion of its efforts and financial resources in the development and commercialization of the lead product, Firdapse^®, and expects Firdapse^® to constitute virtually all of product revenue for the foreseeable future. The Company’s success depends on its ability to effectively commercialize Firdapse^®.

The Company relies exclusively on third parties to formulate and manufacture Firdapse^® and its drug candidates. The commercialization of Firdapse^® and any other drug candidates, if approved, could be stopped, delayed or made less profitable if those third parties fail to provide sufficient quantities of product or fail to do so at acceptable quality levels or prices. The Company does not intend to establish its own manufacturing facilities. The Company is using the same third-party contractors to manufacture, supply, store and distribute drug supplies for clinical trials and for the commercialization of Firdapse^®. If the Company is unable to continue its relationships with one or more of these third-party contractors, it could experience delays in the development or commercialization efforts as it locates and qualifies new manufacturers. The Company intends to rely on one or more third-party contractors to manufacture the commercial supply of its drugs.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for years before 2016. If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be reported as a component of income tax expense.

16

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law making several changes to the Internal Revenue Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income.

The tax law changes in the CARES Act did not have a material impact on the Company’s income tax provision.

Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period.

The following table reconciles basic and diluted weighted average common shares:

Outstanding common stock equivalents totaling approximately 5.4 million, were excluded from the calculation of diluted net income (loss) per common share for the three months ended March 31, 2020 as their effect would be anti-dilutive. For the three months ended March 31, 2019, approximately 10.6 million shares of outstanding stock options were excluded from the calculation of diluted net loss per common share because a net loss was reported in this period and therefore their effect was anti-dilutive.

17

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. The Company adopted the new standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued 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 amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a services contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments in this update require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The Company adopted the new standard on January 1, 2020 and applied prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Available-for-sale investments by security type were as follows:

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There were no realized gains or losses from available-for-sale securities for the three months ended March 31, 2020 or March 31, 2019.

The Company did not hold any securities in an unrealized position for more than 12 months as of March 31, 2020.

The estimated fair values of available-for-sale securities at March 31, 2020, by contractual maturity, are summarized as follows:

Prepaid expenses and other current assets consist of the following:

The Company has operating lease agreements for its corporate office. The leases include options to extend the leases for up to 1 year and options to terminate the lease within 1 year. There are no obligations under finance leases.

The components of lease expense were as follows:

Supplemental cash flow information related to leases was as follows:

Supplemental balance sheet information related to leases was as follows:

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Remaining payments of lease liabilities as of March 31, 2020 were as follows:

Accrued expenses and other liabilities consist of the following:

In December 2018, the Company entered into a collaboration and license agreement (Collaboration) with Endo, for the further development and commercialization of generic Sabril^® (vigabatrin) tablets through Endo’s U.S. Generic Pharmaceuticals segment, doing business as Par Pharmaceutical.

Under the Collaboration, Endo assumes all development, manufacturing, clinical, regulatory, sales and marketing costs under the collaboration, while the Company is responsible for exercising commercially reasonable efforts to develop, or cause the development of, a final finished, stable dosage form of generic Sabril^® tablets.

Under the terms of the Collaboration, the Company has received an up-front payment, and will receive a milestone payment, and a sharing of defined net profits upon commercialization from Endo consisting of a mid-double digit percent of net sales of generic Sabril^®. The Company has also agreed to a sharing of certain development expenses. Unless terminated earlier in accordance with its terms, the collaboration continues in effect until the date that is ten years following the commercial launch of the product.

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The collaborative agreement provides for a $2.0 million milestone payment on the commercial launch of the product by Par. As of March 31, 2020 and 2019, no milestone payments have been earned.

There were no revenues from collaborative arrangement for the three months ended March 31, 2020 and 2019. Total expenses incurred, net, in connection with the collaborative agreement for three months ended March 31, 2020 and March 31, 2019 were approximately $5,700 and $11,952, and have been included in research and development expenses in the accompanying consolidated statements of operations.

In 2018, the Company became aware that certain patents granted to Northwestern University (which patents have been licensed by Northwestern to a third party) for a new GABA aminotransferase inhibitor were developed from CPP-115, which had previously been licensed to the Company by Northwestern. As a result, on October 26, 2018, the Company terminated the license agreement for CPP-115 and commenced an arbitration proceeding against Northwestern seeking damages for alleged breaches of the license agreement. Shortly thereafter, Northwestern filed counterclaims against the Company in the arbitration action seeking damages for alleged breaches by the Company of the license agreement. On May 21, 2019, the Company entered into a settlement agreement with Northwestern that resolved all pending disputes between the parties with no admission of liability by either party, released all claims of liability or wrongdoing between the Company and Northwestern, and dismissed the pending arbitration. Under the settlement agreement, the Company received a $100,000 payment on May 21, 2019, which is reported as income in other income, net in the consolidated statement of operations. The Company is also entitled to receive certain contingent compensation that will be reported when and if received.

In May 2019, the FDA approved an NDA for Jacobus Pharmaceuticals for Ruzurgi^®, their version of amifampridine (3,4-DAP), for the treatment of pediatric LEMS patients (ages 6 to under 17). The Company believes that Jacobus is offering Ruzurgi^® at a lower price than the Company is offering Firdapse^®. In addition, while the NDA for Ruzurgi^® only covers pediatric patients, the Company believes Ruzurgi^® is being prescribed off label to adult LEMS patients. If Jacobus is able to successfully sell Ruzurgi^® off-label to adult LEMS patients, it could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company believes that the FDA’s approval of Ruzurgi^® violated its statutory rights and was in multiple other respects arbitrary, capricious and contrary to law. As a result, in June 2019 the Company filed suit against the FDA and several related parties challenging this approval and related drug labeling. The Company’s complaint, which was filed in the federal district court for the Southern District of Florida, alleges that the FDA’s approval of Ruzurgi^® violated multiple provisions of FDA regulations regarding labeling, resulting in misbranding in violation of the Federal Food, Drug, and Cosmetic Act (FDCA); violated its statutory rights to Orphan Drug Exclusivity and New Chemical Entity Exclusivity under the FDCA; and was in multiple other respects arbitrary, capricious, and contrary to law, in violation of the Administrative Procedure Act. Among other remedies, the suit seeks an order vacating the FDA’s approval of Ruzurgi^®. Jacobus has intervened in the case. Each party has filed a cross motion for summary judgement. There can be no assurance as to the outcome of this lawsuit.

Additionally, from time to time the Company may become involved in legal proceedings arising in the ordinary course of business. Except as set forth above, the Company believes that there is no other litigation pending at this time that could have, individually or in the aggregate, a material adverse effect on its results of operations, financial condition or cash flows.

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On May 29, 2019, the Company entered into an amendment to its license agreement for Firdapse^®. Under the amendment, the Company has expanded its commercial territory for Firdapse^®, which originally was comprised of North America, to include Japan. Additionally, the Company has an option to further expand its territory under the license agreement to include most of Asia, as well as Central and South America, upon the achievement of certain milestones in Japan. Under the amendment, the Company will pay royalties on net sales in Japan of a similar percentage to the royalties that the Company is currently paying under its original license agreement for North America.

During January 2020, the Company was advised that BioMarin has transferred certain rights under the license agreement to SERB S.A.

The Company is subject to income taxes in the U.S. federal jurisdiction and various states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for any years before 2016. If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be reported as a component of income tax expense.

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As of March 31, 2020 and December 31, 2019, based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets including NOL and tax credit carryovers as of March 31, 2020 and December 31, 2019.

Preferred Stock

The Company has 5,000,000 shares of authorized preferred stock, $0.001 par value per share, at March 31, 2020 and December 31, 2019. No shares of preferred stock were outstanding at March 31, 2020 and December 31, 2019.

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Common Stock

The Company has 150,000,000 shares of authorized common stock, par value $0.001 per share. At March 31, 2020 and December 31, 2019, 103,408,699 and 103,397,033 shares, respectively, of common stock were issued and outstanding. Each holder of common stock is entitled to one vote of each share of common stock held of record on all matters on which stockholders generally are entitled to vote.

2017 Shelf Registration Statement

On July 12, 2017, the Company filed a universal shelf Registration Statement on Form S-3 (the 2017 Shelf Registration Statement) with the SEC to sell up to $150 million of common stock, preferred stock, warrants to purchase common stock, or debt securities (including debt securities that may be convertible or exchangeable for common stock or other securities), which securities may be offered separately or together in units or multiple series. The 2017 Shelf Registration Statement (file No. 333-219259) was declared effective by the SEC on July 26, 2017.

On November 28, 2017, the Company filed a prospectus supplement and offered for sale 16,428,572 shares of its common stock at a price of $3.50 per share in an underwritten public offering under the 2017 Shelf Registration. The Company received gross proceeds in the public offering of approximately $57.5 million before underwriting commission and incurred expenses of approximately $3.7 million.

At March 31, 2020, there is approximately $92.5 million available for future sale under the 2017 Shelf Registration Statement.

For the three-month periods ended March 31, 2020 and 2019, the Company recorded stock-based compensation expense as follows:

Stock Options

As of March 31, 2020, there were outstanding stock options to purchase 12,201,668 shares of common stock, of which stock options to purchase 6,687,980 shares of common stock were exercisable as of March 31, 2020.

During the three-month periods ended March 31, 2020 and 2019, the Company granted seven-year term options to purchase an aggregate of 735,000 and 207,000 shares, respectively, of the Company’s common stock to employees and directors. The Company recorded stock-based compensation related to stock options totaling $1,383,672 and $933,411, respectively, during the three-month periods ended March 31, 2020 and 2019. During the three-month periods ended March 31, 2020 and 2019, respectively, 854,831 and 984,164 options vested.

During the three-month periods ended March 31, 2020 and 2019, options to purchase 11,666 shares and 65,000 shares, respectively, of the Company’s common stock were exercised, with proceeds of $26,149 and $89,350 respectively, to the Company.

As of March 31, 2020, there was approximately $10.4 million of unrecognized compensation expense related to non-vested stock option awards granted under the 2014 and 2018 Stock Incentive Plans. The cost is expected to be recognized over a weighted average period of approximately 2.23 years.

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Restricted Stock Units

There were no grants of restricted stock units to employees or directors during the three-month periods ended March 31, 2020 and March 31, 2019. During the three-month period ended March 31, 2020, the Company recorded non-cash stock-based compensation expense related to restricted stock units totaling $135,679. No stock-based compensation related to restricted stocks was recorded during the three-month period ended March 31, 2019.

As of March 31, 2020, there was approximately $1.5 million of unrecognized compensation expense related to non-vested restricted stock units granted under the 2018 Stock Incentive Plan. The cost is expected to be recognized over a weighted average period of approximately 2.67 years.

On May 7, 2020, the Company amended the lease for its office facilities. Under the amended lease, the Company’s leased space will increase from approximately 7,800 square feet of space to approximately 10,700 square feet of space.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide an understanding of our financial condition, changes in financial condition and results of operations. The discussion and analysis is organized as follows:

OVERVIEW

We are a biopharmaceutical company focused on developing and commercializing innovative therapies for people with rare, debilitating, chronic neuromuscular and neurological diseases. We are dedicated to making a meaningful impact on the lives of those suffering from rare diseases, and we believe in putting patients first in everything we do.

Impact of the COVID-19 pandemic on our business

The recent outbreak of a novel strain of coronavirus (COVID-19) has resulted in extended shutdowns of many businesses, the curtailment of travel and large gatherings, and economic and labor instability in the United States and around the world. COVID-19 was declared a pandemic by the World Health Organization in March 2020, and on March 16, 2020, in light of worsening conditions as a result of the pandemic, we implemented a number of safety related initiatives among our employees, including a travel ban and a work from home policy for all employees. This included our customer-facing employees, who are working remotely and utilizing telephone and web-based technologies to provide support to patients and their healthcare providers. Since many healthcare providers are delaying seeing patients other than those affected by COVID-19, this has, starting recently, delayed the diagnosis of LEMS patients and their initiating therapy, which has slowed our efforts to locate new patients who could benefit from our therapy.

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Our Firdapse^® supply chain remains robust and thus far we have observed no disruptions in the production of Firdapse^®. We reiterate that we are committed to providing patients with the ability to obtain an uninterrupted supply of Firdapse^®, and we believe that we have an adequate supply of Firdapse^® to address patients’ needs through at least June 2021. Further, we are advised by our U.S. manufacturing partners that they have implemented contingency plans to remain in operation. We are committed to meeting our “patients” needs for Firdapse^® and believe that our supply chain will remain solid and uninterrupted through the COVID-19 outbreak and beyond.

We were fortunate that all subjects were enrolled in the MuSK-MG trial before the full outbreak of the COVID-19 health emergency. However, while all subject visits in our MuSK-MG trial have now been completed, delays in closing out trial sites and data-collection from the study will likely delay our ability to report top-line results from this trial until the third quarter of 2020. Further, while all of the subjects who have agreed to participate in our SMA Type 3 proof-of-concept study have been identified, the last seven subjects will not be able to complete the trial until the trial sites that are conducting the study are permitted by regulatory authorities to resume clinical trial activities. While there can be no assurance, we now believe that our SMA Type 3 study will be completed later this year and that we will be in a position to report top-line results from this study by the end of 2020.

While we are doing our best to monitor and react to the impact of the COVID-19 health crisis on our business, there can be no assurance as to the ultimate manner in which these recent events will impact our business and our results of operations.

Firdapse^®

In October 2012, we licensed the North American rights to Firdapse^®, a proprietary form of amifampridine phosphate, or chemically known as 3,4-diaminopyridine phosphate. When we acquired the rights to the product, it had already been granted orphan drug designation by the Food and Drug Administration (FDA) for the treatment of patients with LEMS, a rare and sometimes fatal autoimmune disease characterized by muscle weakness. Additionally, in August 2013, we were granted “breakthrough therapy designation” by the FDA for Firdapse^® for the treatment of LEMS. Further, the FDA has granted Orphan Drug Designation for Firdapse^® for the treatment of Myasthenia Gravis (MG).

On November 28, 2018, we received approval from the FDA for Firdapse^® 10 mg tablets for the treatment of adults with LEMS (age 17 and above). In January 2019, we launched Firdapse^® in the United States, selling through a field force experienced in neurologic, central nervous system or rare disease products consisting at the time of approximately 20 field personnel, including sales (Regional Account Managers), patient assistance and insurance navigation support (Patient Access Liaisons), and payer reimbursement (National Account Managers) personnel. We also have a field-based force of six medical science liaisons who are helping educate the medical communities and patients about LEMS and about our ongoing clinical trial activities evaluating Firdapse^® for other ultra-orphan, neuromuscular diseases. Finally, we are working with several rare disease advocacy organizations (including Global Genes, the National Organization for Rare Disorders (NORD), and the Myasthenia Gravis Foundation of America) to help increase awareness and level of support for patients living with LEMS, Anti-MuSK antibody positive myasthenia gravis, or MuSK-MG, and Spinal Muscular Atrophy (SMA) Type 3, and to provide education for the physicians who treat these rare diseases and the patients they treat.

In early 2020, we expanded our field sales group by almost one hundred percent and contracted with a rare-disease experienced inside sales agency. Through this recent expansion of our sales team, we hope to expand our sales efforts beyond the neuromuscular specialists who regularly treat LEMS patients to reach roughly 9,000 neurology and neuromuscular healthcare providers that may be treating an adult LEMS patient who can benefit from Firdapse^®. We also recently launched our no-cost LEMS voltage gated calcium channel (VGCC) antibody testing program (using a commercially available test approved by the FDA) for use by physicians who suspect their patient may have LEMS and wish to reach a definitive diagnosis.

Because of the COVID-19 pandemic, we have recently implemented a number of safety related initiatives among our employees, including a travel ban and a work from home policy for all employees. This included our customer-facing employees, who are working remotely and utilizing telephone and web-based technologies to provide support to patients and their healthcare providers. We are also continuing to expand our digital and social media activities in order to introduce our product to potential patients and their healthcare providers. Since many healthcare providers are delaying seeing patients other than those affected by COVID-19, this has, starting recently, limited our ability to locate new patients who might benefit from our drug and slowed our efforts to increase our sales from prior periods.

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We are supporting the distribution of Firdapse^® through “Catalyst Pathways^™”, our personalized treatment support program. “Catalyst Pathways^™” is a single source for personalized treatment support, education and guidance through the challenging dosing and titration regimen to an effective therapeutic dose. It also includes distributing the drug through a very small group of exclusive specialty pharmacies (primarily AnovoRx), which is consistent with the way that most pharmaceutical products for ultra-orphan diseases are distributed and dispensed to patients. We believe that by using specialty pharmacies in this way, the difficult task of navigating the health care system is far better for the patient needing treatment for their rare disease and the health care community in general.

In order to help adult LEMS patients afford their medication, we, like other pharmaceutical companies which are marketing drugs for ultra-orphan conditions, have developed an array of financial assistance programs that are available to reduce patient co-pays and deductibles to a nominal affordable amount. For eligible patients with commercial coverage, a co-pay assistance program designed to keep out-of-pocket costs to not more than $10.00 per month is available for all LEMS patients prescribed Firdapse^®. We are also donating, and committing to continue to donate, money to qualified, independent charitable foundations dedicated to providing assistance to any U.S. LEMS patients in financial need. Subject to compliance with regulatory requirements, our goal is that no LEMS patient is ever denied access to Firdapse^® for financial reasons.

In May 2019, the FDA approved a New Drug Application (NDA) for Ruzurgi^®, another version of amifampridine (3,4-DAP), for the treatment of pediatric LEMS patients (ages 6 to under 17). Based on publicly available information, we believe that Jacobus Pharmaceuticals is offering Ruzurgi^® at a list price of $80 for each 10 mg tablet, and the Jacobus’ drug is approved up to a maximum daily dose of 100 mg. Based on this price, we believe that the cost for a patient taking a daily dose of 60 mg per day would be $175,200 annually and the cost for a patient taking a daily dose of 100 mg would be $292,000 annually. Both prices are lower than the list price for an equivalent amount of Firdapse^®. In addition, while the NDA for Ruzurgi^® only covers pediatric patients, we believe that Ruzurgi^® is being prescribed off label to some number of adult LEMS patients. If Jacobus is able to successfully sell Ruzurgi^® off-label to additional adult LEMS patients, it could have a material adverse effect on our business, financial condition and results of operations.

We believe that the FDA’s approval of Ruzurgi^® violated our statutory rights and was in multiple other respects arbitrary, capricious and contrary to law. As a result, in June 2019 we filed suit against the FDA and several related parties challenging this approval and related drug labeling. Our complaint, which was filed in the federal district court for the Southern District of Florida, alleges that the FDA’s approval of Ruzurgi^® violated multiple provisions of FDA regulations regarding labeling, resulting in misbranding in violation of the Federal Food, Drug, and Cosmetic Act (FDCA); violated our statutory rights to Orphan Drug Exclusivity and New Chemical Entity Exclusivity under the FDCA; and was in multiple other respects arbitrary, capricious, and contrary to law, in violation of the Administrative Procedure Act. Among other remedies, the suit seeks an order setting aside the FDA’s approval of Ruzurgi^®.

We have filed a motion for summary judgement in our case, and the FDA has filed a cross motion for summary judgement. Further, Jacobus has intervened in the case and has filed their own cross motion for summary judgement. Based on currently available information, we expect a decision in the case sometime later this year. There can be no assurance as to the outcome of this lawsuit, as to the timing of any decision, or as to the likelihood of an appeal if our suit is successful.

We recently completed the last subject visits in our Phase 3 clinical trial evaluating Firdapse^® for the treatment of adults with MuSK-MG. Our trial is a multi-site, international (United States, Italy and Serbia), double-blind, placebo-controlled, clinical trial being conducted under a Special Protocol Assessment (SPA) with the FDA. The trial enrolled more than 60 MuSK antibody positive patients. It also enrolled more than 10 generalized myasthenia gravis patients who were assessed with the same clinical endpoints. However, achieving statistical significance in this subgroup of patients is not required and only summary statistics will be provided. Details of this trial are available on www.clinicaltrials.gov (NCT03304054).

We were fortunate that all subjects were enrolled in our MuSK-MG trial before the full outbreak of the COVID-19 health emergency. However, while all subject visits in our MuSK-MG trial have now been completed, delays in closing out trial sites and data-collection from the trial will likely delay our ability to report top-line results from this trial until the third quarter of 2020.

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If our trial is successful, we intend to file a supplemental new drug application (sNDA) with the FDA for the MUSK-MG indication.

We are currently conducting a proof-of-concept clinical study evaluating Firdapse^® as a symptomatic treatment for ambulatory patients with Spinal Muscular Atrophy (SMA) Type 3. The study, which is being conducted at trial sites in Italy and Serbia, plans to evaluate approximately 12 subjects in a randomized (1:1), double-blind, 2-period, 2-treatment, crossover, outpatient proof-of-concept study evaluating the safety, tolerability and potential efficacy of amifampridine in ambulatory patients diagnosed with SMA Type 3. Details of this trial are available on www.clinicaltrials.gov (NCT03781479).

We have identified and recruited all of the subjects necessary to complete this proof-of-concept study. However, the last seven subjects will not be able to complete the study until the trial sites conducting the study are permitted to resume clinical trial activities. While there can be no assurance, we now believe that this study will be completed later this year and that we will be in a position to report top-line results from this study before the end of 2020.

We also plan to begin studies in 2020 evaluating Firdapse^® as a treatment for Kennedy’s Disease and Hereditary Neuropathy with liability to Pressure Palsies (HNPP). However, our plans for these studies have not yet been finalized and we do not yet know what form they will take or what timelines they will be on.

There can be no assurance that our clinical programs evaluating Firdapse^® for the treatment of MuSK-MG, SMA Type 3, or any trials we may undertake in the future to evaluate Firdapse^® for the treatment of other rare neuromuscular diseases, will be successful. Further, there can be no assurance that we will ever be granted the right to commercialize Firdapse^® for any of these additional indications.

We are also currently in the early stages of developing a long-acting formulation of amifampridine. We have retained a contractor which is currently assisting us in developing the formulation of the product. We currently anticipate that initial formulation candidates and their drug release and absorption properties should be determined during 2020. There can be no assurance we will be able to successfully develop a long-acting formulation of amifampridine and that such formulation will ever be approved by the FDA for commercialization.

In October 2019, we submitted an NDS in Canada seeking approval of Firdapse^® for the treatment of LEMS. Our application has been accepted for review and we have been granted a priority review. There can be no assurance that our application will be approved. In addition, since there is no orphan exclusivity in Canada, even if our NDS for Firdapse^® is approved, there can be no assurance that any application for amifampridine filed by other parties will not be approved as well. As a result, even if our NDS is approved, we may face competition in Canada for LEMS patients.

In May 2019, we entered into an amendment to our license agreement for Firdapse^®. Under the amendment, we have expanded our commercial territory for Firdapse^®, which originally was comprised of North America, to include Japan. Additionally, we have an option to further expand our territory under the license agreement to include most of Asia, as well as Central and South America, upon the achievement of certain milestones in Japan. Under the amendment, we will pay royalties on net sales in Japan of a similar percentage to the royalties that we are currently paying under our original license agreement for North America.

We are currently in discussions with Japanese regulatory authorities to determine the type of clinical trial that will be required before we will be granted the right to file an application to commercialize Firdapse^® in Japan. There can be no assurance that we will successfully obtain the right to commercialize Firdapse^® in Japan.

All of our patent rights for Firdapse^® are derived from our license agreement. Under the License Agreement, we licensed two pending patents and certain trademarks for Firdapse^®. One of the licensed applications, U.S. App. No. 10/467,082 is abandoned as are its children (U.S. App. No. 14/085,017 and 14/818,848) such that we are no longer pursuing patent protection out of this family of applications. The second licensed patent application claims methods of administering Firdapse^®. We recently received an office action from the United States Patent and Trademark Office responding to our second application, and we are in the process of responding to that office action. There can be no assurance that our pending patent will be granted or as to the protection from competition that it will provide us if it is granted.

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Further, there can be no assurance that we do not or will not infringe on patents held by third parties or that third parties in the future will not claim that we have infringed on their patents. In the event that our products or technologies infringe or violate the patent or other proprietary rights of third parties, there is a possibility we may be prevented from pursuing product development, manufacturing or commercialization of our products that utilize such technologies until the underlying patent dispute is resolved. For example, there may be patents or patent applications held by others that contain claims that our products or operations might be determined to infringe or that may be broader than we believe them to be. Given the complexities and uncertainties of patent laws, there can be no assurance as to the impact that future patent claims against us may have on our business, financial condition, results of operations, or prospects.

Generic Sabril^®

In December 2018, we entered into a definitive agreement with Endo International plc’s subsidiary, Endo Ventures Limited (“Endo”), for the further development and commercialization of generic Sabril^® tablets through Endo’s United States Generic Pharmaceuticals segment, Par Pharmaceutical. Pursuant to the agreement, in December 2018, we received an up-front payment of $500,000. We will be entitled to receive a milestone payment of $2.0 million on the commercial launch of the product. Further, we will receive a sharing of defined net profits upon commercialization and we are obligated to share the costs of certain development expenses.

There can be no assurance that our collaboration with Endo for the development of generic Sabril^® (vigabatrin) tablets will be successful and that if an abbreviated new drug application (ANDA) is approved for vigabatrin tablets in the future, that it will be profitable to us.

Capital Resources

At March 31, 2020, we had cash and investments of approximately $101.8 million. Based on our current financial condition and forecasts of available cash, we believe that we have sufficient funds to support our operations for at least the next 12 months from the date of this Form 10-Q. There can be no assurance that we will continue to be successful in commercializing Firdapse^® or will continue to be profitable and cash flow positive. Further, there can be no assurance that if we need additional funding in the future, whether such funding will be available to us. See “Liquidity and Capital Resources” below for further information on our liquidity and cash flow.

Basis of Presentation

Revenues.

At March 31, 2020 we continued to generate revenues from product sales of Firdapse^®. We expect these revenues to fluctuate in future periods based on our sales of Firdapse^®. At March 31, 2020 and March 31, 2019, we did not generate revenues under our collaborative agreement with Endo. We expect our revenues from the collaborative agreement to fluctuate in future periods based on our collaborator’s ability to meet various regulatory milestones set forth in such agreement.

Cost of Sales.

Cost of sales consists of third-party manufacturing costs, freight, royalties, and indirect overhead costs associated with sales of Firdapse^®. Cost of sales may also include period costs related to certain inventory manufacturing services, inventory adjustments charges, unabsorbed manufacturing and overhead costs, and manufacturing variances. Prior to FDA approval in November 2018, the cost of manufacturing Firdapse^® was expensed, including our build-up of anticipated launch product. This has caused cost of sales to appear artificially low as we consumed product manufactured prior to approval, and will continue to do so until we deplete such product and additional product is manufactured.

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Research and Development Expenses.

Our research and development expenses consist of costs incurred for company-sponsored research and development activities, as well as support for selected investigator-sponsored research. The major components of research and development costs include preclinical study costs, clinical manufacturing costs, clinical study and trial expenses, insurance coverage for clinical trials, consulting, and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead costs related to our product development efforts. To date, all of our research and development resources have been devoted to the development of Firdapse^®, CPP-109 (our version of vigabatrin), and formerly CPP-115, and we currently expect that our future development costs will be attributable principally to the continued development of Firdapse^®.

Our cost accruals for clinical studies and trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical study and trial sites and clinical research organizations (CROs). In the normal course of our business we contract with third parties to perform various clinical study and trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events or milestones, the successful enrollment of patients, the allocation of responsibilities among the parties to the agreement, and the completion of portions of the clinical study or trial or similar conditions. The objective of our accrual policy is to match the recording of expenses in our consolidated financial statements to the actual services received and efforts expended. As such, expense accruals related to preclinical and clinical studies or trials are recognized based on our estimate of the degree of completion of the event or events specified in the specific study or trial contract. We monitor service provider activities to the extent possible; however, if we underestimate activity levels associated with various studies or trials at a given point in time, we could be required to record significant additional research and development expenses in future periods. Preclinical and clinical study and trial activities require significant up-front expenditures. We anticipate paying significant portions of a study or trial’s cost before they begin, and incurring additional expenditures as the study or trial progresses and reaches certain milestones.

Selling, General and Administrative Expenses.

During 2019, we actively committed funds to developing our commercialization program for Firdapse^® and we have continued to incur commercialization expenses, inclusive of sales, marketing, patient services, patient advocacy and other commercialization related expenses, as we have continued our sales program for Firdapse^®.

Our general and administrative expenses consist primarily of salaries and personnel expenses for accounting, corporate, compliance, and administrative functions. Other costs include administrative facility costs, regulatory fees, insurance, and professional fees for legal, information technology, accounting, and consulting services.

Stock-Based Compensation.

We recognize expense for the fair value of all stock-based awards to employees, directors, and consultants in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). For stock options, we use the Black-Scholes option valuation model in calculating the fair value of the awards.

Income Taxes.

Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes.

We are currently conducting a study of the availability for use of our net operating loss carryforwards and other credits under Section 382 of the Internal Revenue Code, and the results of this study could impact the amounts of net operating losses and other credits that we have available for use in future periods, and the timing of their use.

Recently Issued Accounting Standards.

For discussion of recently issued accounting standards, please see Note 2, “Basis of Presentation and Significant Accounting Policies,” in the interim consolidated financial statements included in this report.

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Non-GAAP Financial Measures.

We prepare our consolidated financial statements and notes thereto which accompany this report in accordance with U.S. GAAP. To supplement our financial results presented on a U.S. GAAP basis, we may use non-GAAP financial measures in our reports filed with the Commission and/or our communications with investors. Non-GAAP measures are provided as additional information and not as an alternative to our consolidated financial statements presented in accordance with GAAP. Our non-GAAP financial measures are intended to enhance an overall understanding of our current financial performance. We believe that the non-GAAP financial measures we present provide investors and prospective investors with an alternative method for assessing our operating results in a manner that we believe is focused on the performance of ongoing operations and provide a more consistent basis for comparison between periods.

The non-GAAP financial measure that we present excludes from the calculation of net income the non-cash expense associated with stock-based compensation. Further, we often report non-GAAP net income (loss) per share, which is calculated by dividing non-GAAP net income (loss) by the weighted average common shares outstanding.

Any non-GAAP financial measures that we report should not be considered in isolation or as a substitute for comparable U.S. GAAP accounting, and investors should read them in conjunction with our financial statements and notes thereto prepared in accordance with U.S. GAAP. Finally, the non-GAAP measures of net income (loss) we may use may be different from, and not directly comparable to, similarly titled measures used by other companies.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. For a full discussion of our accounting policies, please refer to Note 2 on the Financial Statements included in our 2019 Annual Report on Form 10-K filed with the SEC. Our most critical accounting policies and estimates include: revenue recognition, leases, accounting for research and development expenses and stock-based compensation, measurement of fair value, income taxes, and reserves. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, our expected course of development, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Annual Report on Form 10-K.

Results of Operations

Revenues.

For the three-month periods ended March 31, 2020 and 2019, we recognized $29,136,472 and $12,448,438, respectively, in net revenue from product sales from Firdapse^®. We had no revenues from our collaborative arrangement for the three months ended March 31, 2020 and 2019.

Cost of Sales.

Cost of sales was approximately $4.2 million for the three months ended March 31, 2020 compared to approximately $1.7 million for the three months ended March 31, 2019. Cost of sales consists principally of royalty payments which are based on net revenue as defined in the applicable license agreement. Further, cost of sales may be artificially low until we fully utilize product manufactured and recorded as expense prior to FDA approval of Firdapse^®.

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Research and Development Expenses.

Research and development expenses for the three-month periods ended March 31, 2020 and 2019 were approximately $4.2 million and $3.3 million, respectively, and represented approximately 22.9% and 24.6% of total operating costs and expenses for the three-month periods ended March 31, 2020 and 2019, respectively. Research and development expenses for the three months ended March 31, 2020 and 2019 were as follows:

For the three months ended March 31, 2020, research and development expenses increased approximately $0.9 million compared to the same period in 2019, primarily attributable to the following:

We expect that research and development expenses will continue to be substantial in 2020 as we continue our clinical program evaluating Firdapse^® for the treatment of MuSK-MG, continue our proof-of-concept trial for SMA Type 3, continue our Expanded Access Program, take steps to develop a sustained release formulation of Firdapse^®, begin to evaluate Firdapse^® as a treatment for other neuromuscular diseases, and assuming positive results from the trial, prepare a sNDA for Firdapse^® for the treatment of MuSK-MG.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses for the three months ended March 31, 2020 and 2019 were approximately $10.1 million and $8.4 million, respectively, and represented 54.6% and 62.6% of total operating costs and expenses for the three months ended March 31, 2020 and 2019, respectively. Selling, general and administrative expenses for the three months ended March 31, 2020 and 2019 were as follows:

For the three months ended March 31, 2020, selling, general and administrative expenses increased approximately $1.6 million compared to the same period in 2019, primarily attributable to the following:

We expect that selling, general and administrative expenses will be substantial in future periods as we continue our efforts to sell Firdapse^® and take steps that we hope will help us expand our business.

Stock-Based Compensation.

Total stock-based compensation for the three-month periods ended March 31, 2020 and 2019 were $1,519,351 and $933,411, respectively. In the first quarter of 2020, grants were principally for options relating to 2019 year-end bonus awards. In the first quarter of 2019, most of the option grants were to new employees hired in connection with the launch of Firdapse^®.

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Other Income, Net.

We reported other income, net in all periods relating to our investment of funds received from offerings of our securities and product sales. For the three months ended March 31, 2019, other income, net also included $100,000 received as part of the settlement agreement between us and Northwestern. Excluding the settlement income, the slight increase in other income, net for the three months ended March 31, 2020 when compared to the same period in 2019 is primarily due to higher invested balances, partly offset by lower yields on investments. Other income, net, typically consists of interest income, dividend income and unrealized and realized gain (loss) on trading securities.

Income Taxes.

We incurred net operating losses since inception through the three-month period ended March 31, 2019. Our effective income tax rate was 5.4% and 0.0% for the three months ended March 31, 2020 and 2019, respectively. Differences in the effective tax and the statutory federal income tax rate of 21% is driven by state income taxes and anticipated annual permanent differences, including orphan drug credit expense limitations and other items.

We had no uncertain tax positions as of March 31, 2020 and December 31, 2019. We have a full valuation allowance for our deferred tax assets at March 31, 2020 and December 31, 2019.

Net Income (Loss).

Our net income was $10,426,015 for the three months ended March 31, 2020 ($0.10 per basic and diluted share) as compared to a net loss of ($644,503) for the three months ended March 31, 2019 ($0.01 per basic and diluted share).

Non-GAAP Net Income.

Our non-GAAP net income, which excludes for the three months ended March 31, 2020 a $1,519,351 expense associated with non-cash stock-based compensation was $11,945,366 ($0.12 and $0.11, respectively, per basic and diluted share). Our non-GAAP net income for the three months ended March 31, 2019 was $288,908 ($0.00 per basic and diluted share), which excludes non-cash stock-based compensation of $933,411.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through multiple public and private offering of our securities and, since January 2019, from revenues from product sales. At March 31, 2020, we had cash and cash equivalents and investments aggregating approximately $101.8 million and working capital of approximately $99.3 million. At December 31, 2019, we had cash and cash equivalents and investments aggregating approximately $94.5 million and working capital of approximately $87.3 million. At March 31, 2020, substantially all of our cash and cash equivalents were deposited with one financial institution, and such balances were in excess of federally insured limits. Further, as of such date, substantially all such funds were invested in money markets and U.S. Treasuries.

We incurred operating losses through the quarter ended March 31, 2019 and reported operating income for the first time during the three and six month periods ended June 30, 2019. We expect to continue to spend substantial dollars on our current and future drug development programs.

Based on forecasts of available cash, we believe that we have sufficient resources to support our currently anticipated operations for at least the next 12 months from the date of this report. There can be no assurance that we will remain profitable and cash-flow positive or that we will be able to obtain any additional funding that we may require in the future.

In the future, we may require additional working capital to support our operations depending on our future success with Firdapse^® sales and whether our results continue to be profitable and cash flow positive. There can be no assurance as to the amount of any such funding that will be required for these purposes or whether any such funding will be available to us when it is required.

In that regard, our future funding requirements will depend on many factors, including:

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We plan to raise additional funds that we may require in the future through public or private equity offerings, debt financings, corporate collaborations or other means. We also may seek governmental grants for a portion of the required funding for our clinical trials and preclinical trials. We may further seek to raise capital to fund additional product development efforts or product acquisitions, even if we have sufficient funds for our planned operations. Any sale by us of additional equity or convertible debt securities could result in dilution to our stockholders. There can be no assurance that any such required additional funding will be available to us at all or available on terms acceptable to us. Further, to the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our technologies or grant sublicenses on terms that are not favorable to us. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs, which could have an adverse effect on our business.

On July 12, 2017, we filed a shelf registration statement with the SEC to sell up to $150 million of common stock, preferred stock, warrants to purchase common stock, debt securities and units consisting of one or more of such securities (the “2017 Shelf Registration Statement”). The 2017 Shelf Registration Statement (file no. 333-219259) was declared effective by the SEC on July 26, 2017. We have completed one offering under the 2017 Shelf Registration Statement, raising net proceeds of approximately $53.8 million from the sale of 16,428,572 shares of our common stock on November 28, 2017.

As of the date of this Form 10-Q, $92.5 million of our 2017 Shelf Registration Statement remains available for future sales.

Cash Flows.

Net cash provided by (used in) operating activities was $7,213,078 and ($8,016,429), respectively, for the three-month periods ended March 31, 2020 and 2019. During the three months ended March 31, 2020 net cash provided by operating activities was primarily attributable to our net income of $10,426,015, decreases in accounts receivable of $3,618,434 and of $1,677,156 of non-cash expenses. This was partially offset by increases of $1,711,641 in prepaid expenses and other current and non-current assets, $254,546 in inventory and decreases of $2,769,870 in accounts payable, $3,699,518 in accrued expenses and other liabilities and $72,952 in operating lease liability. During the three months ended March 31, 2019, net cash used in operating activities was primarily attributable to our net loss of $644,503, increases of $7,251,381 in accounts receivable, $231,485 in prepaid expenses and other current assets and deposits and $40,575 in inventory and decreases of $1,337,154 in accrued expenses and other liabilities, and $67,156 in operating lease liability. This was partially offset by increases of $602,719 in accounts payable, and $953,106 of non-cash expenses. Such additional non-cash expenses consist of depreciation, amortization of right-of-use asset, stock-based compensation expense, and change in accrued interest and accretion of discount in investments.

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Net cash provided by investing activities was $5,000,000, for the three-month period ended March 31, 2020, consisting primarily of proceeds from maturities of investments. Net cash provided by investing activities was $10,449,393 for the three-month period ended March 31, 2019, consisting primarily of proceeds from sales and maturities of investments of $20,400,000, partially offset by purchases of investments of $9,944,974.

Net cash provided by financing activities during the three-month periods ended March 31, 2020 and 2019 was $26,149 and $89,350, respectively, consisting of proceeds from the exercise of options to purchase common stock.

Contractual Obligations and Arrangements.

We have entered into the following contractual arrangements:

Off-Balance Sheet Arrangements.

We currently have no debt or finance leases. We have operating leases for our office facilities. We do not have any off-balance sheet arrangements as such term is defined in rules promulgated by the SEC.

Caution Concerning Forward-Looking Statements

This Current Report on Form 10-Q contains “forward-looking statements”, as that term is defined in the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, plans or objectives for future operations and anticipated results of operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, “believes”, “anticipates”, “proposes”, “plans”, “expects”, “intends”, “may”, and other similar expressions are intended to identify forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or other achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled “Item 1A – Risk Factors” in our 2019 Annual Report on Form 10-K.

The continued successful commercialization of Firdapse^® and the development of additional indications for Firdapse^® is highly uncertain. Factors that will affect our success include the uncertainty of:

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Our current plans and objectives are based on assumptions relating to the commercialization of Firdapse^® and the development of additional indications for Firdapse^®. Although we believe that our assumptions are reasonable, any of our assumptions could prove inaccurate. In light of the significant uncertainties inherent in the forward-looking statements we have made herein, which reflect our views only as of the date of this report, you should not place undue reliance upon such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Market risk represents the risk of changes in the value of market risk-sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows.

Our exposure to interest rate risk is currently confined to our cash and short-term investments that are from time to time invested in highly liquid money market funds and U.S. Treasuries. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. We do not use derivative financial instruments in our investment portfolio. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations.

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PART II. OTHER INFORMATION

Ruzurgi^®

We believe that the FDA’s approval of Ruzurgi^® violated our statutory rights and was in multiple other respects arbitrary, capricious and contrary to law. As a result, in June 2019 we filed suit against the FDA and several related parties challenging this approval and related drug labeling. Our complaint, which was filed in the federal district court for the Southern District of Florida, alleges that the FDA’s approval of Ruzurgi^® violated multiple provisions of FDA regulations regarding labeling, resulting in misbranding in violation of the Federal Food, Drug, and Cosmetic Act (FDCA); violated our statutory rights to Orphan Drug Exclusivity and New Chemical Entity Exclusivity under the FDCA; and was in multiple other respects arbitrary, capricious, and contrary to law, in violation of the Administrative Procedure Act. Among other remedies, the suit seeks an order vacating the FDA’s approval of Ruzurgi^®.

We recently filed a motion for summary judgement in our case, and the FDA has filed a cross motion for summary judgement. Further, Jacobus has intervened in our case and filed their own cross-motion for summary judgement. Based on currently available information, we expect that there will be a decision in the case sometime later this year. There can be no assurance as to the outcome of this lawsuit, the timing of any decision, or the likelihood of an appeal if our suit is successful.

Other Litigation

From time to time we may become involved in legal proceedings arising in the ordinary course of business. Other than as set forth above, we believe that there is no litigation pending at this time that could have, individually or in the aggregate, a material adverse effect on our results of operations, financial condition or cash flows.

There are many factors that affect our business, our financial condition, and the results of our operations. In addition to the information set forth in this quarterly report, you should carefully read and consider “Item 1A. Risk Factors” in Part I, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, of our 2019 Annual Report on Form 10-K filed with the SEC, which contain a description of significant factors that might cause our actual results of operations in future periods to differ materially from those currently expected or desired.

None

None

Not applicable

None

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SIGNATURES

Pursuant to the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 11, 2020

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