UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

For the Quarterly Period Ended September 30, 2019

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 103,047,033 shares of common stock, $0.001 par value per share, were outstanding as of November 8, 2019.

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 STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

For the three and nine months ended September 30, 2019 and 2018

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 innovating 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), Congenital Myasthenic Syndromes (CMS), 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. On January 15, 2019, the Company launched its first product, Firdapse^®, in the United States for the treatment of adults with LEMS (age 17 and above).

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 through March 31, 2019, and started reporting operating income in the three and six month periods ended June 30, 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 12.

Capital Resources

While there can be no assurance, based on currently available information, the Company estimates that it 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.

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, 2018 included in the 2018 Annual Report on Form 10-K filed by the Company with the SEC. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for any future period or for the full 2019 fiscal year.

7

Short-Term Bond Fund

The short-term bond fund is classified in 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 September 30, 2019 and December 31, 2018, the only investment classified as trading securities was the short-term bond fund. Realized losses on trading securities were $0 and $4,980, respectively, for the three and nine months ended September 30, 2019. There were no sales of trading securities for the three and nine months ended September 30, 2018. Unrealized gain (loss) on trading securities was $0 and $89,405, respectively, for the three and nine months ended September 30, 2019, and $0 and ($29,430), respectively, for the three and nine months ended September 30, 2018 and is included in other income, net in the accompanying consolidated statements of operations.

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 from the date of purchase as short-term investments. Available-for-sale securities with stated maturities greater than one year are classified as non-current investments in the accompanying 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. 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.

8

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 and purchased drug product 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.

9

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.

10

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms do not include options to extend or terminate the lease as it is not reasonably certain that it will exercise these options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. Refer to Note 2.r. for discussion on adoption method.

To determine revenue recognition for arrangements that are within the scope of 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 generates 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.

11

Product Revenue, Net: The Company sells Firdapse^® to a 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 60 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 and nine months ended September 30, 2019.

As of September 30, 2019, all of the Company’s sales are 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). 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 September 30, 2019 and, therefore, the transaction price was not reduced further during the three and nine months ended September 30, 2019. 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.

12

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 statement of operations and comprehensive income (loss) through September 30, 2019, as well as a reduction to accounts receivables, 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 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, as well as reductions to accounts receivable, net on the consolidated balance sheets. 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.

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 and accounts receivables, 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.

13

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. 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.

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, collaborators 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 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. For the three and nine months ended September 30, 2019 and 2018, no revenue was recognized.

Refer to Note 8, Collaborative Arrangement, for further discussion on the Company’s collaborative arrangement.

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 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 drugs.

14

Diluted net income 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 0.4 million and 2.9 million, respectively, were excluded from the calculation of diluted net income (loss) per common share for the three and nine months ended September 30, 2019 as their effect would be anti-dilutive. For the three and nine months ended September 30, 2018, approximately 8.1 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 each of these periods and therefore their effect was anti-dilutive. Potentially dilutive options to purchase common stock for both the three and nine months ended September 30, 2018, had exercise prices ranging from $0.79 to $4.64.

15

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting that largely aligns the accounting for share-based payment awards issued to employees and nonemployees. Under this ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. ASU 2018-07 is effective for all entities for annual reporting periods beginning after December 15, 2018, including interim reporting periods within each annual reporting period, with early adoption permitted. The Company has adopted this standard as of January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

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 plans to adopt the new standard on January 1, 2020. The Company does not anticipate the adoption will have a material impact on its consolidated financial position or results of operations.

16

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

There were no realized gains or losses from available-for-sale securities for the three or nine months ended September 30, 2019 or 2018.

The Company did not hold any securities in an unrealized loss position for more than 12 months as of September 30, 2019.

The estimated fair values of available-for-sale securities at September 30, 2019, by contractual maturity, are summarized as follows:

Prepaid expenses and other current assets consist of the following:

17

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:

Payments of lease liabilities as of September 30, 2019 were as follows:

18

Property and equipment, net consists of the following:

Depreciation expense was $6,532 and $26,718, respectively, for the three and nine-month periods ended September 30, 2019 and $9,294 and $25,485, respectively for the three and nine-month periods ended September 30, 2018.

Accrued expenses and other liabilities consist of the following:

In December 2018, the Company entered into a collaboration and license agreement (collaboration) with Endo International plc’s subsidiary, Endo Ventures Limited (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.

Endo has assumed 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 milestone payments based on achievement of regulatory approvals, a sharing of defined net profits upon commercialization from Endo consisting of a mid-double digit percent of net sales of generic Sabril^® and 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. For the year ended December 31, 2018, a $500,000 upfront license fee was recognized.

For the three and nine-month periods ending September 30, 2019, no collaborative arrangement revenue has been received or recognized. Expenses incurred, net, in connection with the collaborative arrangement for the three and nine months ended September 30, 2019 was approximately $31,924 and $70,102, respectively, and have been included in research and development expenses in the accompanying consolidated statements of operations.

19

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^®. The FDA has answered the Company’s complaint and the matter is currently in the discovery phase. 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.

On May 29, 2019, the Company entered into an amendment to its License Agreement with BioMarin 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.

20

The Company’s effective income tax rate is the ratio of income tax expense (benefit) over its income (loss) before income taxes. The effective income tax rate was 4.18% and 0.00% for the nine months ended September 30, 2019 and 2018, 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.

The Company had no uncertain tax positions as of September 30, 2019 and December 31, 2018. The Company has a full valuation allowance at September 30, 2019 and December 31, 2018.

2016 Shelf Registration Statement

On December 23, 2016, the Company filed a shelf Registration Statement on Form S-3 (the 2016 Shelf Registration Statement) with the SEC to sell up to approximately $33.8 million of common stock. The 2016 Shelf Registration Statement (file No. 333-215315) was declared effective by the SEC on January 9, 2017. No sales have been conducted to date under the 2016 Shelf Registration Statement.

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 September 30, 2019, there is approximately $92.5 million available for future sale under the 2017 Shelf Registration Statement.

For the three and nine-month periods ended September 30, 2019 and 2018, the Company recorded stock-based compensation expense as follows:

21

Stock Options

As of September 30, 2019, there were outstanding stock options to purchase 10,135,334 shares of common stock, of which stock options to purchase 5,345,825 shares of common stock were exercisable as of September 30, 2019.

During the three and nine-month periods ended September 30, 2019, the Company granted seven-year term options to purchase an aggregate of 172,500 and 484,500 shares, respectively, of the Company’s common stock to employees. The Company recorded stock-based compensation related to stock options totaling $817,060 and $2,675,467, respectively, during the three and nine-month periods ended September 30, 2019. During the three and nine-month periods ended September 30, 2019, respectively, 74,998 and 1,365,827 options vested.

During the three and nine-month periods ended September 30, 2018, the Company granted seven-year term options to purchase an aggregate of 550,000 and 3,267,500 shares, respectively, of the Company’s common stock to employees and directors. The Company recorded stock-based compensation related to stock options totaling $758,176 and $2,506,026, respectively, during the three and nine-month periods ended September 30, 2018. During the three and nine-month periods ended September 30, 2018, respectively, 5,000 and 1,314,998 options vested.

During the three and nine-month periods ended September 30, 2019, options to purchase 108,332 shares and 298,332 shares, respectively, of the Company’s common stock were exercised, with proceeds of $256,062 and $537,962, respectively, to the Company. During both the three and nine-month periods ended September 30, 2019, options to purchase 6,666 shares of the Company’s common stock were exercised on a “cashless” basis, resulting in the issuance of an aggregate of 3,444 shares of the Company’s common stock.

During the three and nine-month periods ended September 30, 2018, options to purchase 89,999 shares and 136,665 shares, respectively, of the Company’s common stock were exercised, with proceeds of $104,532 and $146,064, respectively, to the Company.

As of September 30, 2019, there was approximately $6,400,076 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 2.0 years.

Common Stock

There were no grants of common stock to employees during the three and nine-month periods ended September 30, 2019. During both the three and nine-month periods ended September 30, 2018, the Company granted 3,094 net shares of common stock to employees as compensation. The Company recorded stock-based compensation related to common stock issued to employees totaling $0 and approximately $15,000, respectively, during the three and nine-month periods ended September 30, 2018.

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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.

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, from BioMarin Pharmaceutical Inc. (BioMarin). When we acquired the rights to the product, it had already been granted orphan drug designation by the United States Food and Drug Administration (FDA) for the treatment of patients with Lambert-Eaton Myasthenic Syndrome (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 Congenital Myasthenic Syndromes (CMS) and 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 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, CMS, and Spinal Muscular Atrophy (SMA) Type 3, and to provide education for the physicians who treat these rare diseases and the patients they treat.

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.

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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 $0.00 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 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). We believe that Jacobus is offering Ruzurgi^® at a lower price than we are offering Firdapse^®. In addition, while the NDA for Ruzurgi^® only covers pediatric patients, we believe that 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 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 vacating the FDA’s approval of Ruzurgi^®. The FDA has answered our complaint and the matter is currently in the discovery phase. There can be no assurance as to the outcome of this lawsuit.

We are currently conducting a Phase 3 clinical trial evaluating Firdapse^® for the treatment of adults with MuSK-MG under a Special Protocol Assessment (SPA) with the FDA. The trial is a multi-site, international (United States and Italy), double-blind, placebo-controlled, clinical trial that is targeted to enroll approximately 60 subjects diagnosed with MuSK-MG. The trial will also enroll up to 10 generalized myasthenia gravis patients who will be assessed with the same clinical endpoints but achieving statistical significance in this subgroup of patients is not required and only summary statistics will be provided. While there can be no assurance, based on currently available information we expect to complete enrollment in this trial by the end of 2019 and to report top-line results from this trial in the first half of 2020. Details of this trial are available on www.clinicaltrials.gov (NCT03304054).

We previously conducted a Phase 3 clinical trial evaluating Firdapse^® for the treatment of genetically confirmed CMS patients. Our trial was the first ever double-blind, placebo-controlled, clinical trial conducted in genetically confirmed CMS patients. In the trial, 20 subjects were enrolled and 16 randomized, in a 2 period, 2 treatment crossover study designed to evaluate the efficacy and safety of amifampridine phosphate in patients (aged 2 years and above) diagnosed with certain genetic subtypes of CMS. While individual patient improvements were observed, the trial did not meet its primary endpoint of subject global impression (SGI) or the secondary endpoint of muscle function measure (MFM) across all tested subtypes. Due to the rarity of CMS, this trial took almost 4 years to recruit.

We are currently scheduled to meet with the FDA before the end of the year to discuss the outcome of the CMS trial and potential paths forward to seek approval of amifampridine phosphate for the symptomatic treatment of some subset of genetic subtypes of CMS. After receiving such additional guidance, we will provide future updates on our plans for this indication.

There can be no assurance as to whether we will be permitted to submit an sNDA for this indication, or, even if we are permitted to submit such application, whether it will ever be approved (and, even if it is approved, for what genetic subtypes of CMS it will be approved).

Because the FDA has granted Orphan Drug Designation for Firdapse^® for the treatment of patients with CMS and Myasthenia Gravis (MG), if we are the first to receive approvals in the future for Firdapse^® for the treatment of CMS or MuSK-MG, of which there can be no assurance, we would be eligible to receive seven years of marketing exclusivity for those indications added to our Firdapse^® labeling.

We are conducting a proof-of-concept clinical study evaluating Firdapse^® as a symptomatic treatment for patients with Spinal Muscular Atrophy (SMA) Type 3, ambulatory. The study is designed as a randomized (1:1), double-blind, 2-period, 2-treatment, crossover, outpatient proof-of-concept study to evaluate the safety, tolerability and potential efficacy of amifampridine in ambulatory patients diagnosed with SMA Type 3. The study is planned to include approximately 12 patients, and we currently expect to report top-line results from this study in the first half of 2020. Details of this trial are available on www.clinicaltrials.gov (NCT03781479).

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There can be no assurance that our clinical programs evaluating Firdapse^® for the treatment of MuSK-MG, CMS, 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.

In October 2019, we submitted an NDS in Canada seeking approval of Firdapse^® for the treatment of LEMS. There can be no assurance that our application will be accepted for review, and even if accepted for review, approved. We have also begun our efforts to develop a sustained release formulation for Firdapse^®, which is part of a longer term strategy for the product. There can be no assurance that we will be successful in our efforts to develop a sustained release formulation of Firdapse.

On May 29, 2019, we entered into an amendment to our license agreement with BioMarin 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.

All of our patent rights for Firdapse^® are derived from our license agreement with BioMarin. Under the BioMarin 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.

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, we may be prevented from pursuing product development, manufacturing or commercialization of our products that utilize such technologies. 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 September 2015, we announced the initiation of a project to develop generic versions of Sabril^® (vigabatrin). Sabril^® is marketed by Lundbeck Inc. in the United States in two dosage forms (powder sachets and tablets) for the treatment of infantile spasms and refractory complex partial seizures. Par Pharmaceutical brought the first generic version of the powder sachet to market, and, to date, several generic versions of the powder sachets have been approved. However, at this time, there is only one approved generic version of the tablets.

On December 18, 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, we have received an up-front payment of $500,000, and we will receive milestone payments based on achievement of regulatory approvals, and a sharing of defined net profits upon commercialization and certain expenses for development.

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.

Available Capital Resources

At September 30, 2019, we had cash and investments of approximately $81.6 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 report. There can be no assurance that we will remain profitable, or as to whether we will require additional funding in the future (and whether any such required funding will be available). See “Liquidity and Capital Resources” below for further information on our liquidity and cash flow.

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Basis of Presentation

Revenues.

Prior to the launch of Firdapse^® in January 2019 we did not generate revenues for product sales. In the periods ended September 30, 2019 we have generated revenues from product sales of Firdapse^®. We expect these revenues to fluctuate in future periods based on our sales of Firdapse^®. At September 30, 2018 we were a development stage company, as we had no revenues from product sales.

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 will cause the cost of sales to appear artificially low for product manufactured prior to approval, until we deplete such product and additional product is manufactured.

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 the first nine months of 2019, we actively committed funds to developing our commercialization program for Firdapse^® and have continued to incur commercialization expenses, inclusive of sales, marketing and other commercialization related expenses as we have begun our sales program for Firdapse^®. We had no product sales or selling expenses in the first nine months of 2018.

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, cost for preparation for commercialization, and professional fees for legal, information technology, accounting, and consulting services.

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Stock-Based Compensation.

We recognize expense for the fair value of all stock-based awards to employees, directors, and consultants in accordance with 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.

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.

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, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies, please refer to Note 2 on the Financial Statements included in our 2018 Annual Report on Form 10-K filed with the SEC. Our most critical accounting policies and estimates include: 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 2018 Annual Report on Form 10-K other than accounting policies for revenue recognition and leases as discussed in Note 2, “Basis of Presentation and Significant Accounting Policies,” in the interim consolidated financial statements included in this report.

Results of Operations

Revenues.

For the three and nine-month periods ended September 30, 2019, we recognized $30.9 million and $72.2 million, respectively, in net revenue from product sales of Firdapse^®. We had no revenues from product sales for the three and nine-month periods ended September 30, 2018.

Cost of Sales.

Cost of sales was $4.4 million and $10.4 million for the three and nine-months ended September 30, 2019, respectively, compared to $0 for both the three and nine-months ended September 30, 2018. The increase in cost of sales was entirely attributable to the commercial launch of Firdapse^® in January 2019. Cost of sales includes 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 prior to approval.

Research and Development Expenses.

Research and development expenses for the three-month periods ended September 30, 2019 and 2018 were approximately $4.6 million and $4.5 million, respectively, and represented approximately 27% and 55% of total operating costs and expenses for the three-month periods ended September 30, 2019, and 2018 respectively. Research and development expenses for the three-months ended September 30, 2019 and 2018 were as follows:

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For the three months ended September 30, 2019, research and development were in-line with those in the same period in 2018.

Research and development expenses for the nine-month periods ended September 30, 2019 and 2018 were approximately $12.5 million and $11.5 million, respectively, and represented approximately 26% and 56% of total operating costs and expenses for the nine-month periods ended September 30, 2019, and 2018 respectively. Research and development expenses for the nine-months ended September 30, 2019 and 2018 were as follows:

For the nine months ended September 30, 2019, research and development expenses increased $1,032,127, respectively, compared to the same period in 2018, primarily attributable to increases in medical and regulatory affairs and quality assurance expenses to support our commercial launch of Firdapse^® and ongoing clinical trials evaluating Firdapse^® for the treatment of other ultra-orphan, neuromuscular diseases; partially offset by a decrease in milestone payments made as part of the settlement agreement with Huxley stockholders during the third quarter of 2018 and a decrease in consulting expenses related to the NDA submission in 2018.

We expect that research and development expenses will continue to be substantial during the balance of 2019 and into 2020 as we continue our clinical program evaluating Firdapse^® for the treatment of MuSK-MG, continue our CMS clinical trial closeout, 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^®, and potentially prepare an sNDA for Firdapse^® for the treatment of MuSK-MG and/or CMS.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses for the three months ended September 30, 2019 and 2018 were approximately $8.1 million and $3.6 million, respectively, and represented 47% and 45% of total operating costs and expenses for the three months ended September 30, 2019 and 2018, respectively. Selling, general and administrative expenses for the three months ended September 30, 2019 and 2018 were as follows:

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Selling, general and administrative expenses for the nine months ended September 30, 2019 and 2018 were approximately $25.5 million and $8.9 million, respectively, and represented 53% and 44% of total operating costs and expenses for the nine months ended September 30, 2019 and 2018, respectively. Selling, general and administrative expenses for the nine months ended September 30, 2019 and 2018 were as follows:

For the three and nine months ended September 30, 2019, selling, general and administrative expenses increased approximately $4.4 million and $16.5 million, respectively, compared to the same period in 2018, primarily attributable to the following:

We expect that selling, general and administrative costs, including commercialization costs, will continue to increase during the balance of 2019 and into 2020 as we continue to expand our sales activities for Firdapse^®, continue to build-up our infrastructure to support our operations, and pursue our lawsuit against the FDA.

Stock-Based Compensation.

Total stock-based compensation for the three and nine-month periods ended September 30, 2019 were $817,060 and $2,675,467, respectively, and for the three and nine-month periods ended September 30, 2018 were $758,176 and $2,521,023, respectively. The increase in stock-based compensation for the three and nine-month periods ended September 30, 2019, when compared to the same period in 2018, is primarily due to the expense of grants to new employees hired in connection with the launch of Firdapse^®.

Other Income, Net.

We reported other income, net in all periods primarily relating to our investment of funds received from offerings of our securities and product sales. The increase in other income, net for the three and nine months ended September 30, 2019 when compared to the same period in 2018 is primarily due to higher invested balances and higher yields on investments. Other income, net, consists of interest income, dividend income, and unrealized and realized gain (loss) on trading securities. For the nine month period ended September 30, 2019, other income, net also includes $100,000 received as part of a settlement agreement between us and Northwestern. These proceeds are used to fund our drug development activities and our operations.

Income Taxes.

Our effective income tax rate was 4.18% and 0.00% for the nine months ended September 30, 2019 and 2018, 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 September 30, 2019 and December 31, 2018. We have a full valuation allowance at September 30, 2019 and December 31, 2018.

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Net Income (Loss).

Our net income was $13,630,179 and $23,945,624, respectively, for the three and nine-months ended September 30, 2019 ($0.13 and $0.23, respectively, per basic and diluted share), as compared to a net loss of ($7,838,873) and ($19,503,905), respectively, for the three and nine months ended September 30, 2018 (($0.08) and ($0.19), respectively, per basic and diluted share).

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through multiple public and private offerings of our securities. However, during January 2019, we launched our initial product, Firdapse^®, and began to receive funds from product sales. At September 30, 2019, we had cash and cash equivalents and investments aggregating $81.6 million and working capital of $72.6 million. At December 31, 2018, we had cash and cash equivalents and short-term investments aggregating $58.5 million and working capital of $45.7 million. At September 30, 2019, 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 short-term interest-bearing obligations, a short-term bond fund, 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 or that we will be able to obtain any additional funding that we may require in the future.

We may also require additional working capital to support our operations depending on our future success with Firdapse^® sales and whether our results continue to be 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:

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.

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On December 23, 2016, we filed a shelf registration statement with the SEC to sell up to $33.8 million of common stock (the “2016 Shelf Registration Statement”). This shelf registration statement was declared effective by the SEC on January 9, 2017. We have made no sales under the 2016 Shelf Registration Statement.

As of the date of this Form 10-Q, the full amount of our 2016 Shelf Registration Statement and $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 $22,320,032 and ($17,795,958), respectively, for the nine-month periods ended September 30, 2019 and 2018. During the nine months ended September 30, 2019, net cash provided by operating activities was primarily attributable to our net income of $23,945,624, increases of $1,809,662 in accounts payable, $6,400,279 in accrued expenses and other liabilities, and of $2,697,950 of non-cash expenses. This was partially offset by increases of $10,095,352 in accounts receivable, net, $543,789 in inventory, and $1,689,618 in prepaid expenses and other current and non-current assets and a decrease of $204,724 in operating lease liability. During the nine months ended September 30, 2018, net cash used in operating activities was primarily attributable to our net loss of $19,503,905, and decreases of $604,591 in accounts payable, and $185,812 in accrued expenses and other liabilities. This was partially offset by a $356,924 decrease in prepaid expenses and other current assets, and $2,141,426 of non-cash expenses. Such additional non-cash expenses consist of depreciation, change in right-of-use asset, stock-based compensation expense, and change in accrued interest and accretion of discount on investments.

Net cash provided by investing activities was $5,565,824 for the nine-month period ended September 30, 2019, consisting primarily of sales/maturities of investments of $40,310,595 and partially offset by purchases of investments of $34,725,401. Net cash used in investing activities was $29,226,047, for the nine-month period ended September 30, 2018, consisting primarily of purchases of investments of $36,790,854 and partially offset by sales/maturities of investments of $7,600,000.

Net cash provided by financing activities during the nine-month periods ended September 30, 2019 and 2018 was $537,962 and $141,616, respectively, consisting primarily of proceeds from the exercise of options to purchase common stock.

Contractual Obligations.

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

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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 achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. The forward-looking statements made in this report are based on current expectations that involve numerous risks and uncertainties, including 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.

Not applicable.

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PART II. OTHER INFORMATION

In 2018, we 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 us by Northwestern. As a result, on October 26, 2018, we 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 us in the arbitration action seeking damages for alleged breaches by us of the license agreement. On May 21, 2019, we 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 us and Northwestern, and dismissed the pending arbitration. Under the settlement agreement, we received $100,000 at the time the settlement agreement was executed and we will also be entitled to receive certain contingent compensation that will be reported when and if it is 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). We believe that Jacobus is offering Ruzurgi^® at a lower price than we are offering Firdapse^®. In addition, while the NDA for Ruzurgi^® only covers pediatric patients, we believe that 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 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 vacating the FDA’s approval of Ruzurgi^®. The FDA has answered our complaint and the matter is currently in the discovery phase. There can be no assurance as to the outcome of this lawsuit.

Additionally, from time to time we may become involved in legal proceedings arising in the ordinary course of business. Except as set forth above, we believe that there is no other 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 2018 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.

The following is an additional risk factor regarding factors that you should consider that has recently arisen:

The FDA has approved Ruzurgi^®, another formulation of amifampridine (3,4-DAP) for LEMS for the treatment of pediatric patients.

In May 2019, we became aware that Jacobus Pharmaceutical had been granted approval of an NDA for Ruzurgi^®, their version of amifampridine (3,4-DAP) for pediatric LEMS patients (ages 6 to under 17). We believe that Jacobus is offering Ruzurgi^® at a lower price than we are offering Firdapse^®. In addition, while the NDA for Ruzurgi^® only covers pediatric patients, we believe Ruzurgi^® is being prescribed off-label in adult patients. While we believe that this approval was violative of our statutory rights and was in multiple other respects arbitrary, capricious, and contrary to law, and we have filed suit to that effect, there can be no assurance that our claims will be successful. If Jacobus is able to successfully sell Ruzurgi^® off-label for adult LEMS patients, it could have a material adverse effect on our business, financial condition and results of operations.