Catalyst Pharmaceuticals, Inc. (the Company) is a development-stage biopharmaceutical company focused on the development and commercialization of prescription drugs targeting rare (orphan) neuromuscular and neurological diseases and disorders, including Lambert-Eaton Myasthenic Syndrome (LEMS) and infantile spasms.

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 and raising capital. The Company’s primary focus is on the development and commercialization of its drug candidates. The Company has incurred operating losses in each period from inception through June 30, 2015. The Company has been able to fund its cash needs to date through several public and private offerings of its common stock and warrants, through government grants, and through an investment by a strategic purchaser. See Note 9.

Capital Resources

On January 31, 2014, the Company filed a Shelf Registration Statement on Form S-3 (the 2014 Shelf Registration Statement) with the U.S. Securities and Exchange Commission (SEC) to sell up to $100 million of common stock. This registration statement (file No. 333-193699) was declared effective by the SEC on March 19, 2014. The Company has conducted two registered direct offerings under the 2014 Shelf Registration Statement. See Note 9.

While there can be no assurance, based on currently available information, the Company estimates that it currently has sufficient resources to support its operations through the end of 2016. The Company will require additional funding to support the Company’s operations in periods after 2016.

The Company may raise required funds 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 such 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.

In the opinion of management, the accompanying unaudited interim 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 statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2014 included in the 2014 Annual Report on Form 10-K filed by the Company with the SEC. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for any future period or for the full 2015 fiscal year.

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 is 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.

As of June 30, 2015, there were outstanding stock options to purchase 3,370,000 shares of common stock, of which stock options to purchase 1,953,333 shares of common stock were exercisable as of June 30, 2015.

For the three and six month periods ended June 30, 2015 and 2014, the Company recorded stock-based compensation expense as follows:

Potentially dilutive options to purchase common stock as of June 30, 2015 and 2014 have exercise prices per share ranging from $0.47 to $4.64 and $0.47 to $6.00, respectively. Potentially dilutive warrants to purchase common stock as of June 30, 2015 and 2014 have exercise prices ranging from $1.04 to $2.08 per share.

2011 Warrants

The Company allocated approximately $1.3 million of proceeds from its October 2011 registered direct offering to the fair value of common stock purchase warrants issued in connection with the offering that are classified as a liability (the 2011 warrants). The 2011 warrants are classified as a liability because of provisions in such warrants that allow for the net cash settlement of such warrants in the event of certain fundamental transactions (as defined in the warrant agreement). The valuation of the 2011 warrants is determined using the Black-Scholes Model. This model uses inputs such as the underlying price of the shares issued when the warrant is exercised, volatility, risk free interest rate and expected life of the instrument. The Company has determined that the 2011 warrants liability should be classified within Level 3 of the fair value hierarchy by evaluating each input for the Black-Scholes Model against the fair value hierarchy criteria and using the lowest level of input as the basis for the fair value classification. There are six inputs: closing price of the Company’s common stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of the Company’s common stock; annual rate of dividends; forfeiture rate; and the risk free rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrants agreement. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of the Company’s common stock would fall under Level 1 of the fair value hierarchy as it is a quoted price in an active market. The risk free rate of return is a Level 2 input, while the historical volatility is a Level 3 input in accordance with the fair value accounting guidance. Since the lowest level input is a Level 3, the Company determined the warrants liability is most appropriately classified within Level 3 of the fair value hierarchy. This liability is subject to fair value mark-to-market adjustment each reporting period.

The calculated value of the 2011 warrants liability was determined using the Black-Scholes Model with the following assumptions:

The following table rolls forward the fair value of the Company’s warrants liability activity for the three and six month periods ended June 30, 2015 and 2014:

During the three and six month periods ended June 30, 2015, 86,957 and 239,131 of the 2011 warrants were exercised, with proceeds to the Company of $113,044 and $310,870, respectively. During the three month period ending June 30, 2014 none of the 2011 warrants were exercised. During the six month period ended June 30, 2014 12,696 of the 2011 warrants were exercised, with proceeds to the Company of $16,504. The Company recognizes the change in the fair value of the warrants liability as a non-operating income or loss in the accompanying statements of operations.

Prepaid expenses consist of the following:

Property and equipment, net consists of the following:

Depreciation expense was $8,975 and $17,123 for the three and six month periods ended June 30, 2015, and $6,083 and $11,368, for the three and six month periods ended June 30, 2014, respectively. The Company has executed a noncancellable operating lease agreement for its corporate offices. During March 2015, the Company entered into the third amendment of the corporate office lease for an additional space within the same building under substantially the same terms in order to accommodate the Company’s expanding operations.

Accrued expenses and other liabilities consist of the following:

The accrued settlement liability of $3,500,000 as of December 31, 2014 is related to the securities class action lawsuit settlement, as disclosed with more particularity in Note 7. The settlement amount was covered by the Company’s insurance carrier; therefore, there was a corresponding insurance recoverable recorded in “Prepaid Expenses and Other Current Assets” in the accompanying balance sheet as of December 31, 2014. See Notes 4 and 7. The settlement became final on April 16, 2015.

Under the license agreement with Northwestern, the Company is responsible for continued research and development of any resulting product candidates. As of June 30, 2015, the Company has paid $251,590 in connection with the license and has accrued license fees of $142,500 in the accompanying June 30, 2015 balance sheet for expenses, maintenance fees and milestones. In addition, the Company is obligated to pay certain milestone payments in future years relating to clinical development activities with respect to CPP-115, and royalties on any products resulting from the license agreement. The next milestone payment of $150,000 is due on August 27, 2015.

As part of the License Agreement, the Company agreed: (i) to pay BioMarin royalties for seven years from the first commercial sale of Firdapse^® equal to 7% of net sales (as defined in the license agreement) in North America for any calendar year for sales up to $100 million, and 10% of net sales in North America in any calendar year in excess of $100 million; (ii) to pay to the third-party licensor of the rights sublicensed to us royalty payments for seven years from the first commercial sale of Firdapse^® equal to 7% of net sales (as defined in the license agreement between BioMarin and the third-party licensor) in any calendar year; and (iii) to pay certain milestone payments that BioMarin is obligated to pay (approximately $2.6 million of which will be due upon acceptance by the FDA of a filing of an NDA for Firdapse^® for the treatment of LEMS, and approximately $7.2 million of which will be due on the unconditional approval by the FDA of an NDA for Firdapse^® for the treatment of LEMS). The Company also agreed to share in the cost of certain post-marketing studies being conducted by BioMarin, and, as of June 30, 2015, the Company had paid BioMarin $3.7 million related to expenses in connection with Firdapse^® studies and trials.

Securities Class Action Lawsuit

The Company has settled its previously disclosed class action lawsuit. For historic information about the class action lawsuit that was filed against the Company in late 2013, see Note 7 to the Notes to Financial Statements in the Company’s financial statements for the year ended December 31, 2014. In connection with the settlement, which became final on April 16, 2015, the Company paid $3.5 million to settle this matter, all of which was paid by the Company’s insurance carrier. Under the settlement, the defendants, and various of their related persons and entities, received a full release of all claims that were or could have been brought in the action, as well as all claims that arise out of, are based upon, or relate to the allegations, transactions, facts, representations, omissions or other matters involved in the action related in any way to the purchase or acquisition of the Company’s securities by class members during the class period.

The settlement contains no admission of any liability or wrongdoing on the part of the defendants, each of whom continue to deny all of the allegations against each of them and believe that the claims were without merit. Because the full amount of the settlement payment was paid by the Company’s insurance carrier, the settlement did not have a material adverse effect on the Company’s financial position or results of operations. There were no opt outs from the settlement.

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 2010. 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.

2014 Shelf Registration Statement

On January 31, 2014, the Company filed a Shelf Registration Statement on Form S-3 (the 2014 Shelf Registration Statement) with the SEC to sell up to $100 million of shares of common stock. This registration statement (file No. 333-193699) was declared effective by the SEC on March 19, 2014. The Company has to date conducted the following sales under the 2014 Shelf Registration Statement:

Warrant Exercises

During the three and six month periods ended June 30, 2015, the Company issued an aggregate of 86,957 and 804,131 shares of its authorized but unissued common stock upon the exercise of previously issued common stock purchase warrants, raising gross proceeds of $113,044 and $1,304,070, respectively. No warrants were exercised during the three month period ended June 30, 2014. During the six month period ended June 30, 2014, the Company issued an aggregate of 12,696 shares of its authorized but unissued common stock upon the exercise of previously issued common stock purchase warrants, raising gross proceeds of $16,504.

Stock Options

During the three and six month periods ended June 30, 2015, the Company granted seven-year options to purchase an aggregate of 230,000 and 415,000 shares of the Company’s common stock to employees and directors, respectively. The options vest over a period of 2 to 3 years. The Company recorded stock-based compensation related to stock options totaling $345,080 and $640,922 respectively, during the three and six month periods ended June 30, 2015. During the three and six month periods ended June 30, 2015, respectively, 70,000 and 95,000 options vested.

During the three and six month periods ended June 30, 2014, the Company granted five-year options to purchase an aggregate of 20,000 and 45,000 shares of the Company’s common stock to employees and consultants. The Company recorded stock-based compensation related to stock options totaling $22,570 and $45,700 respectively, during the three and six month periods ended June 30, 2014. During the three and six month periods ended June 30, 2014, respectively, 13,333 and 38,333 options vested.

No options were exercised on a cashless basis during the three months ended June 30, 2015, or the three and six month periods ended June 30, 2014. During the six month period ended June 30, 2015, options to purchase 829,608 shares of the Company’s common stock were exercised on a “cashless” basis, resulting in the issuance of an aggregate of 673,583 shares of the Company’s common stock.

As of June 30, 2015, there was approximately $2.7 million of unrecognized compensation expense related to non-vested stock compensation awards granted under the 2006 and 2014 Stock Incentive Plans. The cost is expected to be recognized over a weighted average period of approximately 2.35 years.

Restricted Stock Units

No restricted stock units were granted during the three and six month periods ended June 30, 2015 and 2014. The Company recorded stock-based compensation related to restricted stock units totaling $18,815 and $37,424, respectively, during the three and six month periods ended June 30, 2015. As of June 30, 2015, there was $178,845 of total restricted stock unit compensation expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted average period of 2.37 years.

Subsequent to quarter end, the Company issued an aggregate of 329,130 shares of its authorized but unissued common stock upon the exercise of previously issued common stock warrants, raising gross proceeds of $498,069.

In the opinion of management, the accompanying unaudited interim 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 statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2014 included in the 2014 Annual Report on Form 10-K filed by the Company with the SEC. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for any future period or for the full 2015 fiscal year.