Form 10-Q
false2020Q20001369568--12-31us-gaap:ProductMemberus-gaap:ProductMemberus-gaap:ProductMemberus-gaap:ProductMemberP1Yus-gaap:ProductMemberus-gaap:ProductMemberus-gaap:ProductMemberus-gaap:ProductMember 0001369568 2020-01-01 2020-06-30 0001369568 2020-06-30 0001369568 2019-12-31 0001369568 2020-04-01 2020-06-30 0001369568 2019-04-01 2019-06-30 0001369568 2019-01-01 2019-06-30 0001369568 2019-01-01 2019-12-31 0001369568 2019-01-01 2019-03-31 0001369568 2020-01-01 2020-03-31 0001369568 2020-08-06 0001369568 2018-12-31 0001369568 2019-06-30 0001369568 2019-03-31 0001369568 2020-03-31 0001369568 cprx:UsTreasuryBondSecuritiesCashEquivalentsMember 2020-06-30 0001369568 us-gaap:MoneyMarketFundsMember 2020-06-30 0001369568 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2020-06-30 0001369568 us-gaap:USTreasurySecuritiesMember 2020-06-30 0001369568 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel2Member 2020-06-30 0001369568 us-gaap:RestrictedStockUnitsRSUMember 2020-06-30 0001369568 cprx:OptionsToPurchaseCommonStockMember 2020-06-30 0001369568 cprx:UsTreasuryBondSecuritiesShortTermMember 2019-12-31 0001369568 cprx:UsTreasuryBondSecuritiesCashEquivalentsMember 2019-12-31 0001369568 us-gaap:MoneyMarketFundsMember 2019-12-31 0001369568 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2019-12-31 0001369568 us-gaap:USTreasurySecuritiesMember 2019-12-31 0001369568 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0001369568 cprx:ShortTermBondFundMember 2019-12-31 0001369568 cprx:ShortTermBondFundMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0001369568 us-gaap:ResearchAndDevelopmentExpenseMember 2020-04-01 2020-06-30 0001369568 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2020-04-01 2020-06-30 0001369568 us-gaap:AdditionalPaidInCapitalMember 2020-04-01 2020-06-30 0001369568 us-gaap:CommonStockMember 2020-04-01 2020-06-30 0001369568 cprx:OptionsToPurchaseCommonStockMember 2020-04-01 2020-06-30 0001369568 us-gaap:RestrictedStockUnitsRSUMember 2020-04-01 2020-06-30 0001369568 us-gaap:CollaborativeArrangementMember 2020-04-01 2020-06-30 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-04-01 2020-06-30 0001369568 us-gaap:RetainedEarningsMember 2020-04-01 2020-06-30 0001369568 us-gaap:EmployeeStockOptionMember 2020-04-01 2020-06-30 0001369568 us-gaap:ResearchAndDevelopmentExpenseMember 2019-04-01 2019-06-30 0001369568 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2019-04-01 2019-06-30 0001369568 us-gaap:AdditionalPaidInCapitalMember 2019-04-01 2019-06-30 0001369568 us-gaap:CommonStockMember 2019-04-01 2019-06-30 0001369568 cprx:OptionsToPurchaseCommonStockMember 2019-04-01 2019-06-30 0001369568 us-gaap:OtherIncomeMember 2019-04-01 2019-06-30 0001369568 us-gaap:CollaborativeArrangementMember 2019-04-01 2019-06-30 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0001369568 us-gaap:RetainedEarningsMember 2019-04-01 2019-06-30 0001369568 us-gaap:RestrictedStockUnitsRSUMember 2019-04-01 2019-06-30 0001369568 us-gaap:EmployeeStockOptionMember 2019-04-01 2019-06-30 0001369568 us-gaap:ResearchAndDevelopmentExpenseMember 2019-01-01 2019-06-30 0001369568 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2019-01-01 2019-06-30 0001369568 cprx:OptionsToPurchaseCommonStockMember 2019-01-01 2019-06-30 0001369568 us-gaap:OtherIncomeMember 2019-01-01 2019-06-30 0001369568 us-gaap:CollaborativeArrangementMember 2019-01-01 2019-06-30 0001369568 us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-06-30 0001369568 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-06-30 0001369568 us-gaap:ResearchAndDevelopmentExpenseMember 2020-01-01 2020-06-30 0001369568 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2020-01-01 2020-06-30 0001369568 cprx:UsTreasuryBondSecuritiesCashEquivalentsMember 2020-01-01 2020-06-30 0001369568 cprx:LicenseAgreementWithBioMarinMember 2020-01-01 2020-06-30 0001369568 srt:MaximumMember cprx:LicenseAgreementWithBioMarinMember 2020-01-01 2020-06-30 0001369568 srt:MinimumMember cprx:LicenseAgreementWithBioMarinMember 2020-01-01 2020-06-30 0001369568 cprx:OptionsToPurchaseCommonStockMember 2020-01-01 2020-06-30 0001369568 us-gaap:RestrictedStockUnitsRSUMember 2020-01-01 2020-06-30 0001369568 srt:MaximumMember 2020-01-01 2020-06-30 0001369568 srt:MinimumMember 2020-01-01 2020-06-30 0001369568 us-gaap:CollaborativeArrangementMember 2020-01-01 2020-06-30 0001369568 us-gaap:EmployeeStockOptionMember 2020-01-01 2020-06-30 0001369568 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-03-31 0001369568 us-gaap:CommonStockMember 2020-01-01 2020-03-31 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-03-31 0001369568 us-gaap:RetainedEarningsMember 2020-01-01 2020-03-31 0001369568 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-03-31 0001369568 us-gaap:CommonStockMember 2019-01-01 2019-03-31 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-03-31 0001369568 us-gaap:RetainedEarningsMember 2019-01-01 2019-03-31 0001369568 cprx:UsTreasuryBondSecuritiesCashEquivalentsMember 2019-01-01 2019-12-31 0001369568 cprx:UsTreasuryBondSecuritiesShortTermMember 2019-01-01 2019-12-31 0001369568 cprx:SettlementAgreementMember us-gaap:OtherIncomeMember 2019-05-01 2019-05-21 0001369568 cprx:TwoThousandSeventeenShelfRegistrationStatementMember 2017-07-12 0001369568 cprx:UnderwrittenPublicOfferingMember 2017-11-28 2017-11-28 0001369568 cprx:UnderwrittenPublicOfferingMember 2017-11-28 0001369568 cprx:TwoThousandTwentyShelfRegistrationStatementMember 2020-07-23 0001369568 us-gaap:SubsequentEventMember 2020-07-23 0001369568 us-gaap:CommonStockMember 2020-06-30 0001369568 us-gaap:AdditionalPaidInCapitalMember 2020-06-30 0001369568 us-gaap:RetainedEarningsMember 2020-06-30 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-06-30 0001369568 us-gaap:CommonStockMember 2019-06-30 0001369568 us-gaap:AdditionalPaidInCapitalMember 2019-06-30 0001369568 us-gaap:RetainedEarningsMember 2019-06-30 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-06-30 0001369568 us-gaap:CommonStockMember 2019-12-31 0001369568 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001369568 us-gaap:RetainedEarningsMember 2019-12-31 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001369568 us-gaap:CommonStockMember 2020-03-31 0001369568 us-gaap:AdditionalPaidInCapitalMember 2020-03-31 0001369568 us-gaap:RetainedEarningsMember 2020-03-31 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-03-31 0001369568 us-gaap:CommonStockMember 2018-12-31 0001369568 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001369568 us-gaap:RetainedEarningsMember 2018-12-31 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001369568 us-gaap:CommonStockMember 2019-03-31 0001369568 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0001369568 us-gaap:RetainedEarningsMember 2019-03-31 0001369568 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 iso4217:USD xbrli:shares xbrli:pure utr:sqft iso4217:USD xbrli:shares cprx:Vote
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
[Mark One]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2020
OR
 
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
No. 001-33057
 
 
CATALYST PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
76-0837053
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
355 Alhambra Circle
Suite 1250
Coral Gables, Florida
 
33134
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (305)
420-3200
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Ticker
Symbol
 
Name of Exchange
on Which Registered
Common Stock, par value $0.001 per share
 
CPRX
 
NASDAQ Capital Market
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:
 
Large accelerated filer      Accelerated Filer  
Non-accelerated
filer
     Smaller reporting company  
     Emerging growth company  
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
103,463,460
shares of common stock, $0.001 par value per share, were outstanding as of
August 6, 2020
.
 
 
 

CATALYST PHARMACEUTICALS, INC.
INDEX
PART I. FINANCIAL INFORMATION
 
Item 1.
  
FINANCIAL STATEMENTS
  
     
 
  
  
 
3
 
 
  
  
 
4
 
 
  
  
 
5
 
 
  
  
 
6
 
 
  
  
 
7
 
Item 2.
  
  
 
23
 
Item 3.
  
  
 
35
 
Item 4.
  
  
 
36
 
     
 
  
PART II. OTHER INFORMATION
  
     
     
Item 1.
  
  
 
36
 
Item 1A.
  
  
 
36
 
Item 2.
  
  
 
37
 
Item 3.
  
  
 
37
 
Item 4.
  
  
 
37
 
Item 5.
  
  
 
37
 
Item 6.
  
  
 
37
 
  
 
38
 
 
2

CATALYST PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
 
    
June 30,
2020
   
December 31,
2019
 
     (unaudited)        
ASSETS
    
Current Assets:
    
Cash and cash equivalents
   $ 115,052,248     $ 89,511,710  
Short-term investments
     —         5,007,050  
Accounts receivable, net
     6,762,262       10,536,997  
Inventory
     1,827,924       1,956,792  
Prepaid expenses and other current assets
     7,521,253       4,351,074  
  
 
 
   
 
 
 
Total current assets
     131,163,687       111,363,623  
Operating lease
right-of-use
asset
     71,711       793,252  
Property and equipment, net
     167,514       210,467  
Deposits
     8,888       8,888  
  
 
 
   
 
 
 
Total assets
   $ 131,411,800     $ 112,376,230  
  
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
Current Liabilities:
    
Accounts payable
   $ 5,804,778     $ 4,117,447  
Accrued expenses and other liabilities
     14,405,597       19,981,295  
  
 
 
   
 
 
 
Total current liabilities
     20,210,375       24,098,742  
Operating lease liability, net of current portion
     —         647,532  
  
 
 
   
 
 
 
Total liabilities
     20,210,375       24,746,274  
Commitments and contingencies
  
Stockholders’ equity:
    
Preferred stock, $0.001 par value, 5,000,000 shares authorized: none issued and outstanding at June 30, 2020 and December 31, 2019
              —    
Common stock, $0.001 par value, 150,000,000 shares authorized; 103,422,032 shares and 103,397,033 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
     103,422       103,397  
Additional
paid-in
capital
     219,581,816       216,205,678  
Accumulated deficit
     (108,482,622     (128,688,624
Accumulated other comprehensive income (loss)
     (1,191     9,505  
  
 
 
   
 
 
 
Total stockholders’ equity
     111,201,425       87,629,956  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 131,411,800     $ 112,376,230  
  
 
 
   
 
 
 
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)
 
    
For the Three Months Ended

June 30,
    
For the Six Months Ended

June 30,
 
    
2020
   
2019
    
2020
   
2019
 
Product revenue, net
   $ 29,604,764   $ 28,837,900      $ 58,741,236     $ 41,286,338  
  
 
 
   
 
 
    
 
 
   
 
 
 
Operating costs and expenses:
         
Cost of sales
     4,139,873     4,261,625        8,290,739       5,973,413  
Research and development
     4,349,643     4,629,364        8,572,454       7,937,323  
Selling, general and administrative
     10,833,358     8,987,722        20,896,406       17,404,182  
  
 
 
   
 
 
    
 
 
   
 
 
 
Total operating costs and expenses
     19,322,874     17,878,711        37,759,599       31,314,918  
  
 
 
   
 
 
    
 
 
   
 
 
 
Operating income
 (loss)
     10,281,890       10,959,189        20,981,637       9,971,420  
Other income, net
     111,269       450,410        447,502       793,676  
  
 
 
   
 
 
    
 
 
   
 
 
 
Net income
(loss)
before income taxes
     10,393,159       11,409,599        21,429,139       10,765,096  
Provision for income taxes
     613,172       449,651        1,223,137       449,651  
  
 
 
   
 
 
    
 
 
   
 
 
 
Net income
 (loss)
   $ 9,779,987     $ 10,959,948      $ 20,206,002     $ 10,315,445  
  
 
 
   
 
 
    
 
 
   
 
 
 
Net income
(loss)
per share:
         
Basic
   $ 0.09     $ 0.11      $ 0.20     $ 0.10  
  
 
 
   
 
 
    
 
 
   
 
 
 
Diluted
   $ 0.09     $ 0.10      $ 0.19     $ 0.10  
  
 
 
   
 
 
    
 
 
   
 
 
 
Weighted average shares outstanding:
         
Basic
     103,414,523       102,869,202        103,410,881       102,808,897  
  
 
 
   
 
 
    
 
 
   
 
 
 
Diluted
     106,730,423       105,928,970        106,433,862       105,098,930  
  
 
 
   
 
 
    
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
   $ 9,779,987   $ 10,959,948      $ 20,206,002     $ 10,315,445  
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on
available-for-sale
securities
     (84,942     28,446        (10,696     42,006  
  
 
 
   
 
 
    
 
 
   
 
 
 
Comprehensive income
 (loss)
   $ 9,695,045     $ 10,988,394      $ 20,195,306     $ 10,357,451  
  
 
 
   
 
 
    
 
 
   
 
 
 
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 six months ended June 30, 2020 and 2019
 
    
Preferred
    
Common Stock
    
Additional
Paid-in
    
Accumulated
   
Accumulated
Other
Comprehensive
       
    
Stock
    
Shares
    
Amount
    
Capital
    
Deficit
   
Gain (Loss)
   
Total
 
Balance at December 31, 2019
   $ —          103,397,033      $ 103,397      $ 216,205,678      $ (128,688,624   $ 9,505     $ 87,629,956  
Issuance of stock options for services
     —          —          —          1,383,672        —         —         1,383,672  
Exercise of stock options for common stock
     —          11,666        12        26,137        —         —         26,149  
Amortization of restricted stock for services
     —          —          —          135,679        —         —         135,679  
Other comprehensive gain (loss)
     —          —          —          —          —         74,246       74,246  
Net income
 
(loss)
     —          —          —          —          10,426,015       —         10,426,015  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at March 31, 2020
  
 
—          103,408,699     
 
103,409     
 
217,751,166     
 
(118,262,609  
 
83,751    
 
99,675,717  
Issuance of stock options for services
     —          —          —          1,627,105        —         —         1,627,105  
Exercise of stock options for common stock
     —          13,333        13        36,188        —         —         36,201  
Amortization of restricted stock for services
     —          —          —         
167,357
       —         —         167,357  
Other comprehensive gain (loss)
     —          —          —          —          —         (84,942     (84,942
Net
income (loss)
     —          —          —          —          9,779,987       —         9,779,987  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
   $ —          103,422,032      $ 103,422      $ 219,581,816      $ (108,482,622   $ (1,191   $ 111,201,425  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
    
Preferred
    
Common Stock
    
Additional
Paid-in
    
Accumulated
   
Accumulated
Other
Comprehensive
       
    
Stock
    
Shares
    
Amount
    
Capital
    
Deficit
   
Gain (Loss)
   
Total
 
Balance at December 31, 2018
  
$
—          102,739,257     
$
102,739     
$
211,265,279     
$
(160,563,961  
$
(20,248  
$
50,783,809  
Issuance of stock options for services
     —          —          —          933,411        —         —         933,411  
Exercise of stock options for common stock
     —          65,000        65        89,285        —         —         89,350  
Other comprehensive gain (loss)
     —          —          —          —          —         13,560       13,560  
Net income (loss)
     —          —          —          —          (644,503     —         (644,503
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at March 31, 2019
  
 
—          102,804,257     
 
102,804     
 
212,287,975     
 
(161,208,464  
 
(6,688  
 
51,175,627  
Issuance of stock options for services
     —          —          —          924,996        —         —         924,996  
Exercise of stock options for common stock
     —          125,000        125        192,425        —         —         192,550  
Other comprehensive gain (loss)
     —          —          —          —          —         28,446       28,446  
Net
income (loss)
     —          —          —          —          10,959,948       —         10,959,948  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at June 30, 2019
   $ —          102,929,257      $ 102,929    $ 213,405,396      $ (150,248,516   $ 21,758     $ 63,281,567  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

CATALYST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
    
For the Six Months Ended
June 30,
 
    
2020
   
2019
 
Operating Activities:
    
Net income
 
(loss)
   $ 20,206,002     $ 10,315,445  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
    
Depreciation
     42,953       20,186  
Amortization of
right-of-use
asset
     721,541       120,051  
Stock-based compensation
     3,313,813       1,858,407  
Change in accrued interest and accretion of discount on investments
     (3,646     (77,547
(Increase) decrease in:
    
Accounts receivable, net
     3,774,735       (10,376,427
Inventory
     128,868       (213,867
Prepaid expenses and other current assets and deposits
     (3,170,179     161,178  
Increase (decrease) in:
    
Accounts payable
     1,687,331       991,359  
Accrued expenses and other liabilities
     (5,473,075     3,393,753  
Operating lease liability
     (750,155     (135,123
  
 
 
   
 
 
 
Net cash provided by (used in) operating activities
     20,478,188       6,057,415  
Investing Activities:
    
Purchases of property and equipment
     —         (19,370
Purchases of investments
     —         (29,772,428
Proceeds from maturities and sales of investments
     5,000,000       30,310,595  
  
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     5,000,000       518,797  
Financing Activities:
    
Proceeds from exercise of stock options
     62,350       281,900  
  
 
 
   
 
 
 
Net cash provided by (used in) financing activities
     62,350       281,900  
  
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     25,540,538       6,858,112  
Cash and cash equivalents—beginning of period
     89,511,710       16,559,400  
  
 
 
   
 
 
 
Cash and cash equivalents—end of period
   $ 115,052,248     $ 23,417,512  
  
 
 
   
 
 
 
Supplemental disclosures of cash flow information:
    
Cash paid for income taxes
   $ 49,500     $ —  
Non-cash
investing and financing activities:
    
Unrealized gain (loss) on
available-for-sale
securities
   $ (10,696   $ 42,006  
The accompanying notes are an integral part of these consolidated financial statements.
 
6

CATALYST PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Organization and Description of Business.
Catalyst Pharmaceuticals, Inc. and subsidiary (collectively, the “Company”) is a commercial-stage biopharmaceutical company focused on developing and commercializing innovative therapies for people with rare debilitating, chronic neuromuscular and neurological diseases, including Lambert-Eaton Myasthenic Syndrome (LEMS), Anti-MuSK antibody positive myasthenia gravis
(MuSK-MG),
and Spinal Muscular Atrophy (SMA) Type 3.
On November 28, 2018, the U.S. Food and Drug Administration, or FDA, granted approval of Firdapse
®
for the treatment of adults with LEMS (ages 17 and above). On January 15, 2019, the Company launched its first product, Firdapse
®
, in the United States for the treatment of adults with LEMS.
Since inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets, raising capital, and selling its product. The Company incurred operating losses in each period from inception, and started reporting operating income during the year ended December 31, 2019. The Company has been able to fund its cash needs to date through several public and private offerings of its securities and from revenues from product sales. See Note 11 (Stockholders’ Equity).
Capital Resources
While there can be no assurance, based on currently available information, the Company estimates that it currently has sufficient resources to support its operations for at least the next 12 months from the issuance date of this Form
10-Q.
The Company may raise required funds in the future through public or private equity offerings, debt financings, corporate collaborations, governmental research grants or other means. The Company may also seek to raise new capital to fund additional product development efforts, even if it has sufficient funds for its planned operations. Any sale by the Company of additional equity or convertible debt securities could result in dilution to the Company’s current stockholders. There can be no assurance that any required additional funding will be available to the Company at all or available on terms acceptable to the Company. Further, to the extent that the Company raises additional funds through collaborative arrangements, it may be necessary to relinquish some rights to the Company’s drug candidates or grant sublicenses on terms that are not favorable to the Company. If the Company is not able to secure additional funding when needed, the Company may have to delay, reduce the scope of, or eliminate one or more research and development programs, which could have an adverse effect on the Company’s business.
Risks and Uncertainties
There are many uncertainties regarding the novel coronavirus
(COVID-19)
pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how the pandemic is impacting its patients, employees, suppliers, vendors, business partners, clinical trials
,
and distribution channels. The Company is unable to predict the impact that
COVID-19
will have on its financial position and operating results in future periods due to numerous uncertainties. The Company will continue to assess the evolving impact of the
COVID-19
pandemic and make adjustments to its operations as necessary.
 
2.
Basis of Presentation and Significant Accounting Policies.
 
 
a.
INTERIM FINANCIAL STATEMENTS.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP), and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting of interim financial information. Pursuant to such rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The consolidated balance sheet as of December 31, 2019 included in this Form
10-Q
was derived from the audited financial statements and does not include all disclosures required by U.S. GAAP.
 
7

2.
Basis of Presentation and Significant Accounting Policies (continued).
 
In the opinion of management, the accompanying unaudited interim consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of the dates and for the periods presented. Accordingly, these consolidated statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2019 included in the 2019 Annual Report on Form
10-K
filed by the Company with the SEC. The results of operations for the six months ended June 30, 2020 are not necessarily indicative of the results to be expected for any future period or for the full 2020 fiscal year.
 
 
b.
PRINCIPLES OF CONSOLIDATION
. The consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiary, Catalyst Pharmaceuticals Ireland, Ltd. (“Catalyst Ireland”). All intercompany accounts and transactions have been eliminated in consolidation. Catalyst Ireland was organized in 2017.
 
 
c.
USE OF ESTIMATES.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
 
d.
CASH AND CASH EQUIVALENTS.
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist mainly of money market funds and U.S Treasuries. The Company has substantially all of its cash and cash equivalents deposited with one financial institution. These amounts at times may exceed federally insured limits.
 
 
e.
INVESTMENTS
. The Company invests in high credit-quality instruments in order to obtain higher yields on its cash available for investments. At June 30, 2020 and December 31, 2019, investments consisted of U.S. Treasuries. Such investments are not insured by the Federal Deposit Insurance Corporation.
Short-Term Bond Fund
The Company previously owned a short-term bond fund that was classified as trading securities. Trading securities are recorded at fair value based on the closing market price of the security. For trading securities, the Company recognizes realized gains and losses and unrealized gains and losses to earnings. At June 30, 2020 and December 31, 2019, there were no investments classified as trading securities, as the Company sold its interest in the short-term bond fund in 2019. There was no realized or unrealized gain (loss) on trading securities for the three and six months ended June 30, 2020. Realized losses on trading securities during the three and six months ended June 30, 2019 were $0 and $4,980, respectively. Unrealized gain (loss) on trading securities was $36,664 and $89,405 for the three and six months ended June 30, 2019 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 as short-term investments.
Available-for-sale
securities with stated maturities greater than one year are classified as
non-current
investments in its consolidated balance sheets. The Company records
available-for-sale
securities at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses are included in other income, net and are derived using the specific identification method for determining the cost of securities sold. Interest income is recognized when earned and is included in other income, net in the consolidated statements of operations and comprehensive income (loss). The Company recognizes a charge when the declines in the fair value below the amortized cost basis of its
available-for-sale
securities are judged to be other-than-temporary. The Company considers various factors in determining whether to recognize an other-than-temporary charge, including whether the Company intends to sell the security or whether it is more likely than not that the Company would be required to sell the security before recovery of the amortized cost basis. The Company has not recorded any other-than-temporary impairment charges on its
available-for-sale
securities. See Note 3 (Investments).
 
8

2.
Basis of Presentation and Significant Accounting Policies (continued).
 
 
f.
ACCOUNTS RECEIVABLE, NET.
Accounts receivable is recorded net of customer allowance for distribution fees, trade discounts, prompt payment discounts, chargebacks and doubtful accounts. Allowances for distribution fees, trade discounts, prompt payment discounts and chargebacks are based on contractual terms. The Company estimates the allowance for expected credit loss based on existing contractual payment terms, actual payment patterns of its Customer and individual Customer circumstances. At June 30, 2020 and December 31, 2019, the Company determined that an allowance for expected credit loss was not required. No accounts were written off during the periods presented.
 
 
g.
INVENTORY.
Inventories are stated at the lower of cost or net realizable value with cost determined under the
first-in-first-out
(FIFO) cost method. Inventories consist of raw materials and supplies, work
-
in
-
process and finished goods. Costs to be capitalized as inventories primarily include third party manufacturing costs and other overhead costs. The Company began capitalizing inventories post FDA approval of Firdapse
®
on November 28, 2018 as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to the FDA approval of Firdapse
®
were recorded as research and development expenses in prior years’ consolidated statements of operations and comprehensive income (loss). If information becomes available that suggests that inventories may not be realizable, the Company may be required to expense a portion or all of the previously capitalized inventories. As of June 30, 2020 and December 31, 2019, inventory consisted mainly of
work-in-process
and finished goods.
Products that have been approved by the FDA or other regulatory authorities, such as Firdapse
®
, are also used in clinical programs to assess the safety and efficacy of the products for usage in treating diseases that have not been approved by the FDA or other regulatory authorities. The form of Firdapse
®
utilized for both commercial and clinical programs is identical and, as a result, the inventory has an “alternative future use” as defined in authoritative guidance. Raw materials associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use”.
The Company evaluates for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance, and patient usage.
 
 
h.
PREPAID EXPENSES AND OTHER CURRENT ASSETS.
Prepaid expenses and other current assets consist primarily of prepaid research fees, prepaid insurance, prepaid commercialization expenses, prepaid subscription fees and prepaid manufacturing. Prepaid research fees consist of advances for the Company’s product development activities, including contracts for
pre-clinical
studies, clinical trials and studies, regulatory affairs and consulting. Prepaid manufacturing consists of advances for the Company’s drug manufacturing activities. Such advances are recorded as expense as the related goods are received or the related services are performed.
 
 
i.
FAIR VALUE OF FINANCIAL INSTRUMENTS.
The Company’s financial instruments consist of cash and cash equivalents, investments, accounts receivable, accounts payables and accrued expenses and other liabilities. At June 30, 2020 and December 31, 2019, the fair value of these instruments approximated their carrying value.
 
 
j.
FAIR VALUE MEASUREMENTS.
Current Financial Accounting Standards Board (FASB) fair value guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, current FASB guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions that it believes market participants would use in pricing assets or liabilities (unobservable inputs classified within Level 3 of the hierarchy).
 
9

2.
Basis of Presentation and Significant Accounting Policies (continued).
 
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.
 
    
Fair Value Measurements at Reporting Date Using
 
    
Balances as of
June 30, 2020
    
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
    
Significant
Other
Observable
Inputs (Level 2)
    
Significant
Unobservable
Inputs (Level 3)
 
Cash and cash equivalents:
           
Money market funds
   $ 19,628,370      $ 19,628,370      $ —      $ —  
  
 
 
    
 
 
    
 
 
    
 
 
 
U.S. Treasuries
   $ 84,990,900      $ —      $ 84,990,900      $ —  
  
 
 
    
 
 
    
 
 
    
 
 
 
    
Balances as of
December 31,
2019
    
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
    
Significant
Other
Observable
Inputs (Level 2)
    
Significant
Unobservable
Inputs (Level 3)
 
Cash and cash equivalents:
           
Money market funds
   $ 23,963,617      $ 23,963,617      $ —      $ —  
  
 
 
    
 
 
    
 
 
    
 
 
 
U.S. Treasuries
   $ 59,932,200      $ —      $ 59,932,200      $ —  
  
 
 
    
 
 
    
 
 
    
 
 
 
Short-term investments:
           
U.S. Treasuries
   $ 5,007,050      $ —      $ 5,007,050      $ —  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
 
k.
OPERATING LEASES.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease
right-of-use
(“ROU”) assets, other current liabilities, and operating lease liabilities on its consolidated balance sheets. 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.
 
 
l.
REVENUE RECOGNITION.
The Company recognizes revenue when its customer obtains control of the promised goods or services, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. The Company had no contracts with customers until the FDA approved Firdapse
®
in November 2018. Subsequent to receiving FDA approval, the Company entered into an arrangement with one distributor (the “Customer”), who is the exclusive distributor of Firdapse
®
in the United States. The Customer subsequently resells Firdapse
®
to a small group of exclusive specialty pharmacies (“SPs”) whose dispensing activities for patients with specific payors may result in government-mandated or privately negotiated rebate obligations for the Company with respect to the purchase of Firdapse
®
.
 
10

2.
Basis of Presentation and Significant Accounting Policies (continued).
 
To determine revenue recognition for arrangements that are within the scope of Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers (“Topic 606”), the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for product revenue, see Product Revenue, Net below.
The Company also may generate revenues from payments received under a collaborative agreement. Collaborative agreement payments may include nonrefundable fees at the inception of the agreements, milestone and event-based payments for specific achievements designated in the collaborative agreements, and/or royalties on sales of products resulting from a collaborative arrangement. For a complete discussion of accounting for collaborative arrangements, see Revenues from Collaborative Arrangement below.
Product Revenue, Net:
The Company sells Firdapse
®
to the Customer (its exclusive distributor) who subsequently resells Firdapse
®
to both a small group of SPs who have exclusive contracts with the Company to distribute the Company’s products to patients and potentially to medical centers or hospitals on an emergency basis. In addition to the distribution agreement with its Customer, the Company enters into arrangements with health care providers and payors that provide for government-mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products.
The Company recognizes revenue on product sales when the Customer obtains control of the Company’s product, which occurs at a point in time (upon delivery). Product revenue is recorded net of applicable reserves for variable consideration, including discounts and allowances. The Company’s payment terms range between 15 and 30 days.
Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods, and are recorded in cost of sales.
If taxes should be collected from the Customer relating to product sales and remitted to governmental authorities, they will be excluded from revenue. The Company expenses incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that the Company would have recognized is one year or less. However, no such costs were incurred during the three and six month
 periods
 ended June 30, 2020
 and 2019
.
During the three and six months ended June 30, 2020 and 2019, all of the Company’s sales were to its Customer.
Reserves for Variable Consideration:
Revenue from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customer, payors, and other indirect customers relating to the Company’s sale of its products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a customer).
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.
 
11

2.
Basis of Presentation and Significant Accounting Policies (continued).
 
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 June 30, 2020 and, therefore, the transaction price was not reduced further during the three and six months ended June 30, 2020
 and 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.
Trade Discounts and Allowances:
The Company provides its Customer with a discount that is explicitly stated in its contract and is recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company receives sales order management, data and distribution services from the Customer. To the extent the services received are distinct from the sale of Firdapse
®
to the Customer, these payments are classified in selling, general and administrative expenses in the Company’s consolidated statement of operations and comprehensive income (loss). However, if the Company has determined such services received to date are not distinct from the Company’s sale of products to the Customer, these payments have been recorded as a reduction of revenue within the consolidated statement of operations and comprehensive income (loss) through June 30, 2020
 and 2019
, as well as a reduction to accounts receivable, net on the consolidated balance sheets.
Funded
Co-pay
Assistance Program:
The Company contracts with a third-party to manage the
co-pay
assistance program intended to provide financial assistance to qualified commercially-insured patients. The calculation of the accrual for
co-pay
assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with Firdapse
®
that has been recognized as revenue, but remains in the distribution channel at the end of each reporting period. These payments are considered payable to the Customer and the related reserve is recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities in the consolidated balance sheets.
Product Returns:
Consistent with industry practice, the Company offers the SPs and its distributor limited product return rights for damaged and expiring product, provided it is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. The Company estimates the amount of its product sales that may be returned by its Customer and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company has an insignificant amount of returns to date and believes that returns of its products will continue to be minimal.
Provider Chargebacks and Discounts:
Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to the Customer who directly purchases the product from the Company. The Customer charges the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue, net and accounts receivable, net. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by the Customer, and the Company generally issues credits for such amounts within a few weeks of the Customer’s notification to the Company of the resale. Reserves for chargebacks consist principally of chargebacks that the Customer has claimed, but for which the Company has not yet issued a credit.
Government Rebates:
The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
 
12

2.
Basis of Presentation and Significant Accounting Policies (continued).
 
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 payor despite having health insurance, to the extent allowed by applicable law. The Company does not recognize any revenue related to these free products and the associated costs are classified in selling, general and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss).
Revenues from Collaborative Arrangement:
The Company has entered into a collaboration agreement for the further development and commercialization of generic Sabril
®
(vigabatrin) tablets. Pursuant to the terms of this agreement, collaborator could be required to make various payments to the Company, including upfront license fees, milestone payments based on achievement of regulatory approvals, and royalties on sales of products resulting from the collaborative agreement.
Nonrefundable upfront license fees are recognized upon receipt as persuasive evidence of an
arrangement
exists, the price to the collaborator is fixed or determinable and collectability is reasonably assured.
The collaborative agreement provides for a milestone payment upon achievement of development and regulatory events. The Company accounts for milestone payments in accordance with the provisions of Accounting Standards Update (ASU)
No. 2010-17,
Revenue Recognition – Milestone Method (“Milestone Method of Accounting”). The Company recognizes consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:
1. The consideration is commensurate with either the entity’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone;
2. The consideration relates solely to past performance; and
3. The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.
A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the vendor.
The Company believes that achievement of the milestone will be substantive and there will be no substantive uncertainty once the milestone is achieved. The milestone was not achieved in the three and six months ended June 30, 2020 and 2019.
Since the Company will receive royalty reports 60 days after quarter end, royalty revenue from sales of collaboration products by our collaborator will be recognized in the quarter following the quarter in which the corresponding sales occurred. For the three and six months ended June 30, 2020 and 2019, there was no royalty revenue from sales of the collaborative product.
Refer to Note 7 (Collaborative Arrangement), for further discussion on the Company’s collaborative arrangement.
 
 
m.
RESEARCH AND DEVELOPMENT.
Costs incurred in connection with research and development activities are expensed as incurred. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform research related services for the Company.
 
 
n.
STOCK-BASED COMPENSATION.
The Company recognizes expense in the consolidated statements of operations for the fair value of all stock-based payments to employees, directors and consultants, including grants of stock options and other share-based awards. For stock options, the Company uses the Black-Scholes option valuation model, the single-option award approach, and the straight-line attribution method. Using this approach, compensation cost is amortized on a straight-line basis over the vesting period of each respective stock option, generally one to five years. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur.
 
13

2.
Basis of Presentation and Significant Accounting Policies (
continued
).
 
 
o.
CONCENTRATION OF RISK.
The financial instruments that potentially subject the
Company
to concentration of credit risk are cash equivalents (i.e., money market funds), investments and accounts receivable, net. The Company places its cash and cash equivalents with high-credit quality financial institutions. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in these accounts.
The Company sells its product in the United States through an exclusive distributor (its Customer) to specialty pharmacies. Therefore, its distributor and specialty pharmacies account for all of its trade receivables and net product revenues. The creditworthiness of its Customer is continuously monitored, and the Company has internal policies regarding customer credit limits. The Company estimates an allowance for expected credit loss primarily based on the credit worthiness of its Customer, historical payment patterns, aging of receivable balances and general economic conditions.
The Company currently has a single product with limited commercial sales experience, which makes it difficult to evaluate its current business, predict its future prospects and forecast financial performance and growth. The Company has invested a significant portion of its efforts and financial resources in the development and commercialization of the lead product, Firdapse
®
, and expects Firdapse
®
to constitute virtually all of product revenue for the foreseeable future. The Company’s success depends on its ability to effectively commercialize Firdapse
®
.
The Company relies exclusively on third parties to formulate and manufacture Firdapse
®
and its drug candidates. The commercialization of Firdapse
®
and any other drug candidates, if approved, could be stopped, delayed or made less profitable if those third parties fail to provide sufficient quantities of product or fail to do so at acceptable quality levels or prices. The Company does not intend to establish its own manufacturing facilities. The Company is using the same third-party contractors to manufacture, supply, store and distribute drug supplies for clinical trials and for the commercialization of Firdapse
®
. If the Company is unable to continue its relationships with one or more of these third-party contractors, it could experience delays in the development or commercialization efforts as it locates and qualifies new manufacturers. The Company intends to rely on one or more third-party contractors to manufacture the commercial supply of its drugs.
 
 
p.
ROYALTIES.
Royalties incurred in connection with the Company’s license agreement, as disclosed in Note 9 (Agreements), are expensed to cost of sales as revenue from product sales is recognized.
 
 
q.
INCOME TAXES.
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the
more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for years before 2016. If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be reported as a component of income tax expense.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law making several changes to the Internal Revenue Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income.
The tax law changes in the CARES Act did not have a material impact on the Company’s income tax provision.
 
14

2.
Basis of Presentation and Significant Accounting Policies (continued).
 
 
r.
COMPREHENSIVE INCOME (LOSS).
U.S. GAAP requires that all components of comprehensive income (loss) be reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is net income (loss), plus certain other items that are recorded directly into stockholders’ equity. The Company’s comprehensive income (loss) is shown on the consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2020 and 2019, and is comprised of net unrealized gains (losses) on the Company’s
available-for-sale
securities.
 
 
s.
NET INCOME (LOSS) PER COMMON SHARE.
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. With regard to common stock subject to vesting requirements, the calculation includes only the vested portion of such stock and units.
Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period.
The following table reconciles basic and diluted weighted average common shares:
 
    
For the Three Months Ended

June 30,
    
For the Six Months Ended

June 30,
 
    
2020
    
2019
    
2020
    
2019
 
Basic weighted average common shares outstanding
     103,414,523      102,869,202        103,410,881        102,808,897  
Effect of dilutive securities
     3,315,900      3,059,768        3,022,981        2,290,033  
  
 
 
    
 
 
    
 
 
    
 
 
 
Dilutive weighted average common shares outstanding
     106,730,423        105,928,970        106,433,862        105,098,930  
  
 
 
    
 
 
    
 
 
    
 
 
 
Outstanding common stock equivalents totaling approximately
3.5
 million and
4.8
 million, were excluded from the calculation of diluted net income (loss) per common share for the three and six months ended June 30, 2020 as their effect would be anti-dilutive. For the three and six months ended June 30, 2019, approximately 3.0 million and 3.6 
million shares of outstanding stock options were excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive.
 
 
t.
RECLASSIFICATIONS.
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.
 
 
u.
RECENTLY ISSUED ACCOUNTING STANDARDS.
In November 2018, the FASB issued ASU
2018-18,
Collaborative Arrangements (Topic 808), which amends ASC 808 to clarify when transactions between participants in a collaborative arrangement under ASC 808 are within the scope of the FASB’s new revenue standard, ASU
2014-09
(codified in ASC 606). The amendments require the application of ASC 606 existing guidance to determine the units of account that are distinct in a collaborative arrangement for purposes of identifying transactions with customers. If a unit of account within the collaborative arrangement is distinct and is with a customer, an entity shall apply the guidance in Topic 606 to that unit of account. In a transaction between collaborative participants, an entity is precluded by ASU
2018-18
from presenting a transaction together with “revenue from contracts with customers” unless the unit of account is within the scope of ASC 606 and the entity applies the guidance in ASC 606 to such unit of account. The Company adopted the new standard on January 1, 2020. The Company has a collaboration agreement with Endo Ventures Limited (Endo). See Note 7 (Collaborative Arrangement). However, these amendments did not have an impact on the Company’s consolidated financial statements, as Endo does not meet the definition of a customer.
 
15

2.
Basis of Presentation and Significant Accounting Policies (continued).
 
In June 2016, the FASB issued ASU
No. 2016-13,
Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.
The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For
available-for-sale
debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. The Company adopted the new standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU
2018-15,
Intangibles – Goodwill and Other –
Internal-Use
Software (Subtopic
350-40),
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a services contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use
software (and hosting arrangements that include an
internal-use
software license). Accordingly, the amendments in this update require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic
350-40
to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The Company adopted the new standard on January 1, 2020 and applied prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
3.
Investments.
Available-for-sale
investments by security type were as follows:
 
    
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Amortized
Cost
 
At June 30, 2020:
           
U.S. Treasuries – Cash equivalents
   $ 84,990,900      $ —      $ (1,191 )    $ 84,992,091  
  
 
 
    
 
 
    
 
 
    
 
 
 
At December 31, 2019:
           
U.S. Treasuries – Cash equivalents
   $ 59,932,200      $ 2,042      $ —      $ 59,930,158  
U.S. Treasuries – ST
     5,007,050        7,463        —          4,999,587  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 64,939,250      $ 9,505      $ —      $ 64,929,745  
  
 
 
    
 
 
    
 
 
    
 
 
 
There were no realized gains or losses from
available-for-sale
securities for the three or six months ended June 30, 2020 or 2019. The Company did not hold any securities in an unrealized position for more than 12 months as of June 30, 2020.
The estimated fair values of
available-for-sale
securities at June 30, 2020, by contractual maturity, are summarized as follows:
 
    
June 30, 2020
 
Due in one year or less
   $ 84,990,900  
  
 
 
 
 
4.
Prepaid Expenses and Other Current Assets.
Prepaid expenses and other current assets consist of the following:
 
    
June 30, 2020
    
December 31, 2019
 
Prepaid manufacturing costs
   $ 5,499,746      $ 1,526,013  
Prepaid insurance
     622,350        1,263,129  
Prepaid subscription fees
     429,155        501,251  
Prepaid research fees
     458,937        481,057  
Prepaid commercialization expenses
     218,651        62,959  
Other
     292,414        516,665  
  
 
 
    
 
 
 
Total prepaid expenses and other current assets
   $ 7,521,253      $ 4,351,074  
  
 
 
    
 
 
 
 
16

5.
Operating Leases.
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 Company entered into an agreement in May 2020 that amended its lease for its office facilities. Under the amended lease, the Company’s leased space will increase from approximately 7,800 square feet of space to approximately 10,700 square feet of space. The lessor is currently building this space. The lease is expected to commence in early 2021 when construction of the asset is completed and available for use.
 The lease disclosures for the three and six months periods ended June 30, 2020 in these financial statements have been adjusted for the modification of the current lease.
The components of lease expense were as follows:
 
    
For the Three Months
Ended June 30, 2020
    
For the Six Months

Ended June 30, 2020
 
Operating lease cost
   $ 65,434      $
 
 139,513
Supplemental cash flow information related to leases was as follows:
 
    
June 30, 2020
 
Cash paid for amounts included in the measurement of lease liabilities:
  
Operating cash flows
   $ 168,122  
Right-of-use
assets obtained in exchange for lease obligations:
  
Operating leases
   $ 19,255  
Supplemental balance sheet information related to leases was as follows:
 
    
June 30, 2020
 
Operating lease
right-of-use
assets
   $ 71,711  
  
 
 
 
Other current liabilities
   $ 197,896  
Operating lease liabilities, net of current portion
     —      
  
 
 
 
Total operating lease liabilities
   $ 197,896  
  
 
 
 
Weighted average remaining lease term
     0.6 years  
Weighted average discount rate
     3.68%  
Remaining payments of lease liabilities as of June 30, 2020 were as follows:
 
2020 (remaining six months)
   $
 
 
 
 
171,483
 
2021
     28,860  
2022
     —    
  
 
 
 
Total lease payments
     200,343  
Less imputed interest
     (2,447
  
 
 
 
Total
   $ 197,896  
  
 
 
 
 
17

6.
Accrued Expenses and Other Liabilities.
Accrued expenses and other liabilities consist of the following:
 
    
June 30, 2020
    
December 31, 2019
 
Accrued preclinical and clinical trial expenses
   $ 651,692      $ 1,183,513  
Accrued professional fees
     2,464,197        1,241,526  
Accrued compensation and benefits
     2,212,733        3,064,645  
Accrued license fees
     5,866,161        8,751,991  
Accrued purchases
     216,967        1,313,310  
Accrued contributions
     660,000        1,535,000  
Operating lease liability
     197,896        300,518  
Accrued variable consideration
     1,023,537        884,764  
Accrued income tax
     1,081,912        1,533,696  
Other
     30,502        172,332  
  
 
 
    
 
 
 
Current accrued expenses and other liabilities
     14,405,597        19,981,295  
  
 
 
    
 
 
 
Lease
liability—non-current
     —          647,532  
  
 
 
    
 
 
 
Non-current
accrued expenses and other liabilities
     —          647,532  
  
 
 
    
 
 
 
Total accrued expenses and other liabilities
   $ 14,405,597      $ 20,628,827  
  
 
 
    
 
 
 
 
7.
Collaborative Arrangement.
In December 2018, the Company entered into a collaboration and license agreement (Collaboration) with Endo, for the further development and commercialization of generic Sabril
®
(vigabatrin) tablets through Endo’s U.S. Generic Pharmaceuticals segment, doing business as Par Pharmaceutical.
Under the Collaboration, Endo assumes all development, manufacturing, clinical, regulatory, sales and marketing costs under the collaboration, while the Company is responsible for exercising commercially reasonable efforts to develop, or cause the development of, a final finished, stable dosage form of generic Sabril
®
tablets.
Under the terms of the Collaboration, the Company has received an
up-front
payment, and will receive a milestone payment, and a sharing of defined net profits upon commercialization from Endo consisting of a
mid-double-digit
percent of net sales of generic Sabril
®
. The Company has also agreed to a sharing of certain development expenses. Unless terminated earlier in accordance with its terms, the collaboration continues in effect until the date that is ten years following the commercial launch of the product.
The collaborative agreement provides for a $2.0 million milestone payment on the commercial launch of the product by Par. As of June 30, 2020 and 2019, no milestone payments have been earned.
There were no revenues from collaborative arrangement for the three or six months ended June 30, 2020 and 2019. Total expenses incurred, net, in connection with the collaborative agreement for three and six months ended June 30, 2020 were approximately $8,554 and $4,206, respectively. Total expenses incurred, net, in connection with the collaborative agreement for three and six months ended June 30, 2019 were approximately $26,178 and $38,178, respectively. These expenses have been included in research and development expenses in the accompanying consolidated statements of operations.
 
8.
Commitments and Contingencies.
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.
 
18

8.
Commitments and Contingencies (continued).
In May 2019, the FDA approved an NDA for Jacobus Pharmaceuticals for Ruzurgi
®
, their version of amifampridine
(3,4-DAP),
for the treatment of pediatric LEMS patients (ages 6 to under 17). The Company believes that Jacobus is offering Ruzurgi
®
at a lower price than the Company is offering Firdapse
®
. In addition, while the NDA for Ruzurgi
®
only covers pediatric patients, the Company believes Ruzurgi
®
is being prescribed off label to adult LEMS patients. If Jacobus is able to successfully sell Ruzurgi
®
off-label
to adult LEMS patients, it could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company believes that the FDA’s approval of Ruzurgi
®
violated its statutory rights and was in multiple other respects arbitrary, capricious and contrary to law. As a result, in June 2019 the Company filed suit against the FDA and several related parties challenging this approval and related drug labeling. The Company’s complaint, which was filed in the federal district court for the Southern District of Florida, alleges that the FDA’s approval of Ruzurgi
®
violated multiple provisions of FDA regulations regarding labeling, resulting in misbranding in violation of the Federal Food, Drug, and Cosmetic Act (FDCA); violated its statutory rights to Orphan Drug Exclusivity and New Chemical Entity Exclusivity under the FDCA; and was in multiple other respects arbitrary, capricious, and contrary to law, in violation of the Administrative Procedure Act. Among other remedies, the suit seeks an order vacating the FDA’s approval of Ruzurgi
®
. Jacobus has intervened in the case. Each party has filed a cross motion for summary judgement. There can be no assurance as to the outcome of this lawsuit. See Note 13 (Subsequent Events).
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.
 
9.
Agreements.
 
 
a.
LICENSE AGREEMENT WITH BIOMARIN (FIRDAPSE
®
)
. On October 26, 2012, the Company entered into a license agreement with BioMarin Pharmaceutical, Inc. (BioMarin) for the North American rights to Firdapse
®
. Under the license agreement, the Company pays: (i) royalties to the licensor 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; and (ii) royalties to the third-party licensor of the rights sublicensed to the Company 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.
On May 29, 2019, the Company entered into an amendment to its license agreement for Firdapse
®
. Under the amendment, the Company has expanded its commercial territory for Firdapse
®
, which originally was comprised of North America, to include Japan. Additionally, the Company has an option to further expand its territory under the license agreement to include most of Asia, as well as Central and South America, upon the achievement of certain milestones in Japan. Under the amendment, the Company will pay royalties on net sales in Japan of a similar percentage to the royalties that the Company is currently paying under its original license agreement for North America.
During January 2020, the Company was advised that BioMarin has transferred certain rights under the license agreement to SERB S.A.
 
 
b.
AGREEMENTS FOR DRUG MANUFACTURING, DEVELOPMENT, PRECLINICAL AND CLINICAL STUDIES.
The Company has entered into agreements with contract manufacturers for the manufacture of commercial drug and drug and study placebo for the Company’s trials and studies, with contract research organizations (CRO) to conduct and monitor the Company’s trials and studies and with various entities for laboratories and other testing related to the Company’s trials and studies. The contractual terms of the agreements vary, but most require certain advances as well as payments based on the achievement of milestones. Further, these agreements are cancellable at any time, but obligate the Company to reimburse the providers for any time or costs incurred through the date of termination.
 
19

10.
Income Taxes.
The Company is subject to income taxes in the U.S. federal jurisdiction and various states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for any years before 2016. If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be reported as a component of income tax expense.
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As of June 30, 2020 and December 31, 2019, based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets including NOL and tax credit carryovers as of June 30, 2020 and December 31, 2019. 
 
11.
Stockholders’ Equity.
Preferred Stock
The Company has 5,000,000 shares of authorized preferred stock, $0.001 par value per share, at June 30, 2020 and December 31, 2019. No shares of preferred stock were outstanding at June 30, 2020 and December 31, 2019.
Common Stock
The Company has 150,000,000 shares of authorized common stock, par value $0.001 per share. At June 30, 2020 and December 31, 2019, 103,422,032 and 103,397,033 shares, respectively, of common stock were issued and outstanding. Each holder of common stock is entitled to one vote of each share of common stock held of record on all matters on which stockholders generally are entitled to vote.
2017 Shelf Registration Statement
On July 12, 2017, the Company filed a universal shelf Registration Statement on Form
S-3
(the 2017 Shelf Registration Statement) with the SEC to sell up to $150 million of common stock, preferred stock, warrants to purchase common stock, or debt securities (including debt securities that may be convertible or exchangeable for common stock or other securities), which securities may be offered separately or together in units or multiple series. The 2017 Shelf Registration Statement (file
No. 333-219259)
was declared effective by the SEC on July 26, 2017.
 
On November 28, 2017, the Company filed a prospectus supplement and offered for sale 16,428,572 shares of its common stock at a price of $3.50 per share in an underwritten public offering under the 2017 Shelf Registration. The Company received gross proceeds in the public offering of approximately $57.5 million before underwriting commission and incurred expenses of approximately $3.7 
million. 
Subsequent to June 30, 2020, on July 26, 2020, the 2017 Shelf Registration Statement expired.
2020 Shelf Registration Statement
Subsequent to quarter end, on July 23, 2020, the Company filed a shelf registration statement with the SEC to sell
 up to
$
200
 million
of common stock, preferred stock, warrants to purchase common stock, debt securities and units consisting of one or more of such securities (the “2020 Shelf Registration Statement”). The 2020 Shelf Registration Statement (file no.
333-240052)
was declared effective by the SEC on July 31, 2020. As of the date of this report, no offerings have been completed under the Company’s 2020 Shelf Registration Statement. See Note 13 (Subsequent Events).
 
20

12.
Stock Compensation.
For the three and
six-month
periods ended June 30, 2020 and 2019, the Company recorded stock-based compensation expense as follows:
 
 
 
 
 
 
 
    
Three months ended

June 30,
    
Six months ended

June 30,
 
    
2020
    
2019
    
2020
    
2019
 
Research and development
   $ 421,220      $ 273,212      $ 839,273      $ 560,933  
Selling, general and administrative
     1,373,242        651,784        2,474,540        1,297,474  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total stock-based compensation
   $ 1,794,462      $  924,996      $ 3,313,813      $ 1,858,407  
  
 
 
    
 
 
    
 
 
    
 
 
 
Stock Options
As of June 30, 2020, there were outstanding stock options to purchase 12,322,001 shares of common stock, of which stock options to purchase 7,014,645 shares of common stock were exercisable as of June 30, 2020.
During the three and
six-month
periods ended June 30, 2020, the Company granted seven-year term options to purchase an aggregate of 260,000 and 995,000 shares, respectively, of the Company’s common stock to employees and directors. The Company recorded stock-based compensation related to stock options totaling $1,627,105 and $3,010,777, respectively, during the three and
six-month
periods ended June 30, 2020. During the three and
six-month
periods ended June 30, 2020, respectively, 339,998 and 1,194,829 options vested.
During the three and
six-month
periods ended June 30, 2019, the Company granted seven-year term options to purchase an aggregate of 105,000 and 312,000 shares, respectively, of the Company’s common stock to employees. The Company recorded stock-based compensation related to stock options totaling $924,996
 
and $1,858,407, respectively, during the three and
six-month
periods ended June 30, 2019. During the three and
six-month
periods ended June 30, 2019, respectively, 306,665 and 1,290,829 options vested.
During the three and
six-month
periods ended June 30, 2020, options to purchase 13,333 shares and 24,999 shares, respectively, of the Company’s common stock were exercised, with proceeds of $36,201 and $62,350 respectively, to the Company.
During the three and
six-month
periods ended June 30, 2019, options to purchase 125,000 shares and 190,000 shares, respectively, of the Company’s common stock were exercised, with proceeds of $192,550 and $281,900 respectively, to the Company.
As of June 30, 2020, there was approximately $9.2 million of unrecognized compensation expense related to
non-vested
stock option awards granted under the 2014 and 2018 Stock Incentive Plans. The cost is expected to be recognized over a weighted average period of approximately 2.3 years.
Restricted Stock Units
The Company granted 30,000 restricted stock units during the three and
six-month
periods ended June 30, 2020. There were no restricted stock units granted during the three and
six-month
periods ended June 30, 2019. During the three and
six-month
periods ended June 30, 2020, the Company recorded
non-cash
stock-based compensation expense related to restricted stock units totaling $167,357 and $303,036, respectively. No stock-based compensation related to restricted stock units was recorded during the three and
six-month
periods ended June 30, 2019.
As of June 30, 2020, there was approximately $1.3 million of unrecognized compensation expense related to
non-vested
restricted stock units granted under the 2018 Stock Incentive Plan. The cost is expected to be recognized over a weighted average period of approximately 2.5 years.
 
21

13.
Subsequent Events.
Subsequent to quarter end, on July 23, 2020, the Company filed a shelf registration statement with the SEC to sell up to $200 million of common stock, preferred stock, warrants to purchase common stock, debt securities and units consisting of one or more of such securities (the “2020 Shelf Registration Statement”). On July 31, 2020, the 2020 Shelf Registration Statement was declared effective. To the date of this report, no offerings have been completed under the 2020 Shelf Registration Statement. See Note 11 (Stockholders’ Equity).
On July 30, 2020, the Magistrate Judge considering the Company’s lawsuit against the FDA filed a Report and Recommendation in which she recommended to the District Judge handling the case that she grant the FDA’s and Jacobus’ motions for summary judgement and deny the Company’s motion for summary judgement. The decision on whether to grant or deny the Company’s motion for summary judgement remains with the District Judge handling the case.
 
See Note 8 (Commitments and Contingencies).
Subsequent to June 30
, 2020, the Company received approval for its NDS in Canada for Firdapse
®
for the symptomatic treatment of LEMS.
 
22

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide an understanding of our financial condition, changes in financial condition and results of operations. The discussion and analysis is organized as follows:
 
   
Overview.
This section provides a general description of our business and information about our business that we believe is important in understanding our financial condition and results of operations.
 
   
Basis of Presentation.
This section provides information about key accounting estimates and policies that we followed in preparing our consolidated financial statements for
the
second quarter and first half of fiscal 2020.
 
   
Critical Accounting Policies and Estimates.
This section discusses those accounting policies that are both considered important to our financial condition and results of operations, and require significant judgment and estimates on the part of management in their application. All of our significant accounting policies, including the critical accounting policies, are also summarized in the notes to our interim consolidated financial statements that are included in this report.
 
   
Results of Operations.
This section provides an analysis of our results of operations for the three and
six-month
periods ended June 30, 2020 as compared to the same
periods
ended June 30, 2019.
 
   
Liquidity and Capital Resources.
This section provides an analysis of our cash flows, capital resources,
off-balance
sheet arrangements and our outstanding commitments, if any.
 
   
Caution Concerning Forward-Looking Statements.
This section discusses how certain forward-looking statements made throughout this MD&A and in other sections of this report are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstance.
OVERVIEW
We are a biopharmaceutical company focused on developing and commercializing innovative therapies for people with rare, debilitating, chronic neuromuscular and neurological diseases. We are dedicated to making a meaningful impact on the lives of those suffering from rare diseases, and we believe in putting patients first in everything we do.
Impact of the
COVID-19
pandemic on our business
The COVID-19 pandemic
has resulted, and is expected to continue to result, in significant economic disruption, and has adversely affected and will likely continue to adversely affect our business. As of the date of this report, significant uncertainty continues to exist concerning the magnitude of the impact and duration of
the COVID-19 pandemic.
We are actively monitoring the situation and are taking those actions that may be required by federal, state or local authorities or that we determine are in the best interests of our patients, investigators, employees and stockholders. While we are unable to determine or predict the nature, duration or scope of the overall impact that
the COVID-19 pandemic
will have on our business and business prospects and our financial condition, we believe that it is important to share where our company stands today, how our response
to COVID-19 is
progressing, and how our operations and financial condition may change as the fight
against COVID-19 progresses.
In March 2020, in light of worsening conditions as a result of the pandemic, we implemented a number of safety related initiatives among our employees, including a travel ban and a work from home policy for all employees. This included our customer-facing employees, who began working remotely and utilizing telephone and
web-based
technologies to provide support to patients and their healthcare providers. Since many healthcare providers were delaying seeing patients other than those affected by
COVID-19,
we believe that this has delayed the diagnosis of new LEMS patients and their initiating therapy, which has slowed our efforts to locate new patients who could benefit from our therapy. However, as of the date of this report, we believe that some healthcare providers are beginning to again see patients and sales representatives
face-to-face,
and, although we cannot determine with certainty, we are hopeful that over time the impact of this aspect of the
COVID-19
pandemic will lessen.
Our Firdapse
®
supply chain remains robust and thus far we have observed no disruptions in the production of Firdapse
®
. We reiterate that we are committed to providing patients with the ability to obtain an uninterrupted supply of Firdapse
®
, and we believe that we have an adequate supply of Firdapse
®
to address patients’ needs through at least June 2021. Further, we are advised by our U.S. manufacturing partners that they have implemented contingency plans to remain in operation. We are committed to meeting our “patients” needs for Firdapse
®
and believe that our supply chain will remain solid and uninterrupted through the
COVID-19
outbreak and beyond.
 
23

Further, the
COVID-19
pandemic delayed our closing out of trial sites and data-collection from our
MuSK-MG
study, which delayed our ability to report on the
top-line
results from this trial until August 2020. It has also delayed completion of our SMA Type 3
proof-of-concept
study.
While we are doing our best to monitor and react to the impact of the
COVID-19
health crisis on our business, there can be no assurance as to the ultimate manner in which the
COVID-19
crisis will impact our business and our results of operations.
Firdapse
®
In October 2012, we licensed the North American rights to Firdapse
®
, a proprietary form of amifampridine phosphate, or chemically known as
3,4-diaminopyridine
phosphate. When we acquired the rights to the product, it had already been granted orphan drug designation by the Food and Drug Administration (FDA) for the treatment of patients with LEMS, a rare and sometimes fatal autoimmune disease characterized by muscle weakness. Additionally, in August 2013, we were granted “breakthrough therapy designation” by the FDA for Firdapse
®
for the treatment of LEMS. Further, the FDA has granted Orphan Drug Designation for Firdapse
®
for the treatment of Myasthenia Gravis (MG).
On November 28, 2018, we received approval from the FDA for Firdapse
®
10 mg tablets for the treatment of adults with LEMS (age 17 and above). In January 2019, we launched Firdapse
®
in the United States, selling through a field force experienced in neurologic, central nervous system or rare disease products consisting at the time of approximately 20 field personnel, including sales (Regional Account Managers), patient assistance and insurance navigation support (Patient Access Liaisons), and payor reimbursement (National Account Managers) personnel. We also have a field-based force of six medical science liaisons who are helping educate the medical communities and patients about LEMS and about our ongoing clinical trial activities evaluating Firdapse
®
for other ultra-orphan, neuromuscular diseases. Finally, we are working with several rare disease advocacy organizations (including Global Genes, the National Organization for Rare Disorders (NORD), and the Myasthenia Gravis Foundation of America) to help increase awareness and level of support for patients living with LEMS, Anti-MuSK antibody positive myasthenia gravis, or
MuSK-MG,
and Spinal Muscular Atrophy (SMA) Type 3, and to provide education for the physicians who treat these rare diseases and the patients they treat.
In early 2020, we expanded our field sales group by almost one hundred percent and contracted with a rare-disease experienced inside sales agency. Through this recent expansion of our sales team, we hope to expand our sales efforts beyond the neuromuscular specialists who regularly treat LEMS patients to reach roughly 9,000 neurology and neuromuscular healthcare providers that may be treating an adult LEMS patient who can benefit from Firdapse
®
. We are also making available our
no-cost
LEMS voltage gated calcium channel (VGCC) antibody testing program (using a commercially available test approved by the FDA) for use by physicians who suspect that one of their patient may have LEMS and wish to reach a definitive diagnosis.
Because of the
COVID-19
pandemic, in March 2020 we implemented a number of safety related initiatives among our employees, including a travel ban and a work from home policy for all employees. This included our customer-facing employees, who are working remotely and utilizing telephone and
web-based
technologies to provide support to patients and their healthcare providers. We are also continuing to expand our digital and social media activities in order to introduce our product to potential patients and their healthcare providers. While we are starting to see that some healthcare providers are beginning to again see patients and sales representatives face to face (and we hope that trend will continue), since many healthcare providers have delayed seeing patients other than those affected by
COVID-19,
this has limited our ability to locate new patients who might benefit from our drug and slowed our efforts to increase our sales from prior periods.
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.
 
24

In order to help adult LEMS patients afford their medication, we, like other pharmaceutical companies which are marketing drugs for ultra-orphan conditions, have developed an array of financial assistance programs that are available to reduce patient
co-pays
and deductibles to a nominal affordable amount. For eligible patients with commercial coverage, a
co-pay
assistance program designed to keep
out-of-pocket
costs to not more than $10.00 per month is available for all LEMS patients prescribed Firdapse
®
. We are also donating, and committing to continue to donate, money to qualified, independent charitable foundations dedicated to providing assistance to any U.S. LEMS patients in financial need. Subject to compliance with regulatory requirements, our goal is that no LEMS patient is ever denied access to Firdapse
®
for financial reasons.
In May 2019, the FDA approved a New Drug Application (NDA) for Ruzurgi
®
, another version of amifampridine
(3,4-DAP),
for the treatment of pediatric LEMS patients (ages 6 to under 17). Based on publicly available information, we believe that Jacobus Pharmaceuticals is offering Ruzurgi
®
at a cost for a patient taking a daily dose of 60 mg per day of approximately $175,200 annually and a cost for a patient taking a daily dose of 100 mg of approximately $292,000 annually. Both prices are lower than the list price for an equivalent amount of Firdapse
®
. In addition, while the NDA for Ruzurgi
®
only covers pediatric patients, we believe that Ruzurgi
®
is regularly being prescribed off label to adult LEMS patients.
We believe that under applicable law, Jacobus is not permitted to market its amifampridine product to adult LEMS patients in the United States, and we are continuing to aggressively take all steps available to us to protect Firdapse
®
’s exclusivity under the Orphan Drug Act. There can be no assurance, however, that we will be able to stop the
off-label
prescribing of Ruzurgi
®
to adult LEMS patients, and if Jacobus is able to successfully sell Ruzurgi
®
off-label
to additional adult LEMS patients, it could have a material adverse effect on our business, financial condition and results of operations.
We also believe that the FDA’s approval of Ruzurgi
®
violated our statutory rights and was in multiple other respects arbitrary, capricious and contrary to law. As a result, in June 2019 we filed suit against the FDA and several related parties challenging this approval and related drug labeling. Our complaint, which was filed in the federal district court for the Southern District of Florida, alleges that the FDA’s approval of Ruzurgi
®
violated multiple provisions of FDA regulations regarding labeling, resulting in misbranding in violation of the Federal Food, Drug, and Cosmetic Act (FDCA); violated our statutory rights to Orphan Drug Exclusivity and New Chemical Entity Exclusivity under the FDCA; and was in multiple other respects arbitrary, capricious, and contrary to law, in violation of the Administrative Procedure Act. Among other remedies, the suit seeks an order setting aside the FDA’s approval of Ruzurgi
®
. We have filed a motion for summary judgement in our case, and the FDA has filed a cross motion for summary judgement. Further, Jacobus has intervened in the case and has filed their own cross motion for summary judgement.
On July 30, 2020, the Magistrate Judge considering Catalyst’s lawsuit against the FDA filed a Report and Recommendation in which she recommended to the District Judge handling the case that she grant the FDA’s and Jacobus’ motions for summary judgement and deny Catalyst’s motion for summary judgement. We are currently reviewing the Magistrate Judge’s decision, which we believe to be incorrect as a matter of law and contrary to the plain language of the Orphan Drug Act, and we intend to pursue the case further with the District Judge. The decision on whether to grant or deny our motion for summary judgement remains with the District Judge handling the case. We believe that if the Magistrate Judge’s recommendation is correct on the law, it means that the FDA has the authority to effectively eliminate the benefits of exclusivity under the Orphan Drug Act, which we believe will chill the incentive for drug companies like ourselves to spend the millions of dollars necessary to develop an orphan drug.
On August 10, 2020, we announced the
top-line
results from our Phase 3 clinical trial
(MSK-002)
evaluating Firdapse
®
for the treatment of adults with
MuSK-MG.
Our trial was a multi-site, international (United States, Italy and Serbia), double-blind, placebo-controlled, clinical trial being conducted under a Special Protocol Assessment (SPA) with the FDA. The trial enrolled more than 60 MuSK antibody positive patients. It also enrolled more than 10 generalized myasthenia gravis patients who were assessed with the same clinical endpoints. However, achieving statistical significance in this subgroup of patients was not required. Details of this trial are available on www.clinicaltrials.gov (NCT03304054).
The
MSK-002
trial did not achieve statistical significance on the primary endpoint, which was the eight-item Myasthenia Gravis Activities of Daily Living
(MG-ADL)
total score change from baseline to day 10, in this randomized withdrawal trial
 with a score of (p=0.2196).
 The secondary endpoint, Quantitative Myasthenia Gravis (QMG) scale also did not achieve statistical significance (p=0
.3736)
. QMG is a thirteen-item evaluation of ocular, facial, bulbar, gross motor, axial, and respiratory weaknesses. Firdapse
®
was safe and well tolerated during the
MSK-002
trial, and demonstrated a safety profile similar to that seen for Firdapse
®
used for the treatment LEMS.
After all of the data from the MSK-002 trial has been thoroughly evaluated, we intend to meet with our neuromuscular advisors and determine our path forward for this indication. We plan to make the results of this study available in a future scientific forum
.
 
25

We are currently conducting a
proof-of-concept
clinical study evaluating Firdapse
®
as a symptomatic treatment for ambulatory patients with Spinal Muscular Atrophy (SMA) Type 3. The study, which is being conducted at trial sites in Italy and Serbia, has enrolled the anticipated 12 subjects in a randomized (1:1), double-blind,
2-period,
2-treatment,
crossover, outpatient
proof-of-concept
study evaluating the safety, tolerability and potential efficacy of amifampridine in ambulatory patients diagnosed with SMA Type 3. Details of this trial are available on
www.clinicaltrials.gov (NCT03781479)
. We believe that our SMA Type 3 study will be completed this year and that we will be in a position to report
top-line
results from this study before the end of 2020.
We are also supporting investigator-sponsored studies evaluating Firdapse
®
as a treatment for Kennedy’s Disease and Hereditary Neuropathy with liability to Pressure Palsies (HNPP).
There can be no assurance that our study evaluating Firdapse
®
for the treatment of SMA Type 3, or any trials we may undertake or support 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
MuSK-MG,
SMA Type 3, or any other additional indications.
We are currently in the early stages of developing a long-acting formulation of amifampridine. We have retained a contractor which is currently assisting us in developing the formulation of the product. We currently anticipate that initial formulation candidates and their drug release and absorption properties shall be determined during 2020. There can be no assurance that we will be able to successfully develop a sustained release formulation of Firdapse
®
, that any such formulation will be approved for marketing, or that any such formulation will be commercially viable.
The Canadian NDS for Firdapse
®
for the symptomatic treatment of LEMS that we submitted in October 2019, was approved by Health Canada on August 4, 2020. Since there is no orphan exclusivity in Canada, there can be no assurance that any application for amifampridine filed by other parties will not be approved as well. As a result, we may face competition in Canada for LEMS patients in the future.
We are currently in discussions with a potential marketing and distribution partner in Canada. There can be no assurance that we will reach an agreement for a marketing and collaboration agreement in Canada with this or any other potential partners.
In May 2019, we entered into an amendment to our license agreement for Firdapse
®
. Under the amendment, we have expanded our commercial territory for Firdapse
®
, which originally was comprised of North America, to include Japan. Additionally, we have an option to further expand our territory under the license agreement to include most of Asia, as well as Central and South America, upon the achievement of certain milestones in Japan. Under the amendment, we will pay royalties on net sales in Japan of a similar percentage to the royalties that we are currently paying under our original license agreement for North America.
We recently met with Japanese regulatory authorities and believe that we have reached a tentative agreement with them as to the scope of the clinical trial that we will be required to undertake in Japan before we will be permitted to submit an application to the Japanese regulatory authorities to seek to commercialize Firdapse
®
for the treatment of LEMS in Japan. We also intend to apply for orphan drug designation in Japan for the symptomatic treatment of LEMS. There can be no assurance that we will successfully obtain the right to commercialize Firdapse
®
in Japan or obtain orphan drug designation.
All of our patent rights for Firdapse
®
are derived from our license agreement. Under the License Agreement, we licensed two pending patents and certain trademarks for Firdapse
®
. One of the licensed applications, U.S. App. No. 10/467,082 is abandoned as are its children (U.S. App. No. 14/085,017 and 14/818,848) such that we are no longer pursuing patent protection out of this family of applications. The second licensed patent application claims methods of administering Firdapse
®
We recently received an office action from the United States Patent and Trademark Office responding to our second application, and we have responded 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.
 
26

Further, there can be no assurance that we do not or will not infringe on patents held by third parties or that third parties in the future, will not claim that we have infringed on their patents. In the event that our products or technologies infringe or violate the patent or other proprietary rights of third parties, there is a possibility we may be prevented from pursuing product development, manufacturing or commercialization of our products that utilize such technologies until the underlying patent dispute is resolved. For example, there may be patents or patent applications held by others that contain claims that our products or operations might be determined to infringe or that may be broader than we believe them to be. Given the complexities and uncertainties of patent laws, there can be no assurance as to the impact that future patent claims against us may have on our business, financial condition, results of operations, or prospects.
Generic Sabril
®
In December 2018, we entered into a definitive agreement with Endo International plc’s subsidiary, Endo Ventures Limited (“Endo”), for the further development and commercialization of generic Sabril
®
tablets through Endo’s United States Generic Pharmaceuticals segment, Par Pharmaceutical. Pursuant to the agreement, in December 2018, we received an
up-front
payment of $500,000. We will be entitled to receive a milestone payment of $2.0 million on the commercial launch of the product. Further, we will receive a sharing of defined net profits upon commercialization and we are obligated to share the costs of certain development expenses.
There can be no assurance that our collaboration with Endo for the development of generic Sabril
®
(vigabatrin) tablets will be successful and that if an abbreviated new drug application (ANDA) is approved for vigabatrin tablets in the future, that it will be profitable to us.
Capital Resources
At June 30, 2020, we had cash and investments of approximately $115.1 million. Based on our current financial condition and forecasts of available cash, we believe that we have sufficient funds to support our operations for at least the next 12 months from the date of this Form
10-Q.
There can be no assurance that we will continue to be successful in commercializing Firdapse
®
or will continue to be profitable and cash flow positive. Further, there can be no assurance that if we need additional funding in the future, whether such funding will be available to us. See “Liquidity and Capital Resources” below for further information on our liquidity and cash flow.
Basis of Presentation
Revenues.
At June 30, 2020 we continued to generate revenues from product sales of Firdapse
®
. We expect these revenues to fluctuate in future periods based on our sales of Firdapse
®
. At June 30, 2020 and June 30, 2019, we did not generate revenues under our collaborative agreement with Endo. We expect our revenues from the collaborative agreement to fluctuate in future periods based on our collaborator’s ability to meet various regulatory milestones set forth in such agreement.
 
27

 
Cost of Sales.
Cost of sales consists of third-party manufacturing costs, freight, royalties, and indirect overhead costs associated with sales of Firdapse
®
. Cost of sales may also include period costs related to certain inventory manufacturing services, inventory adjustments charges, unabsorbed manufacturing and overhead costs, and manufacturing variances. Prior to FDA approval in November 2018, the cost of manufacturing Firdapse
®
was expensed, including our
build-up
of anticipated launch product. This has caused cost of sales to appear artificially low as we consumed product manufactured prior to approval, and will continue to do so until we deplete such product and additional product is manufactured and distributed.
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 investigator-sponsored research. The major components of research and development costs include preclinical study costs, clinical manufacturing costs, clinical study and trial expenses, insurance coverage for clinical trials, consulting, and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead costs related to our product development efforts. To date, all of our research and development resources have been devoted to the development of Firdapse
®
,
CPP-109
(our version of vigabatrin), and formerly
CPP-115,
and we currently expect that our future development costs will be attributable principally to the continued development of Firdapse
®
.
Our cost accruals for clinical studies and trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical study and trial sites and clinical research organizations (CROs). In the normal course of our business we contract with third parties to perform various clinical study and trial activities in the
on-going
development of potential products. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events or milestones, the successful enrollment of patients, the allocation of responsibilities among the parties to the agreement, and the completion of portions of the clinical study or trial or similar conditions. The objective of our accrual policy is to match the recording of expenses in our consolidated financial statements to the actual services received and efforts expended. As such, expense accruals related to preclinical and clinical studies or trials are recognized based on our estimate of the degree of completion of the event or events specified in the specific study or trial contract. We monitor service provider activities to the extent possible; however, if we underestimate activity levels associated with various studies or trials at a given point in time, we could be required to record significant additional research and development expenses in future periods. Preclinical and clinical study and trial activities require significant
up-front
expenditures. We anticipate paying significant portions of a study or trial’s cost before they begin, and incurring additional expenditures as the study or trial progresses and reaches certain milestones.
Selling, General and Administrative Expenses.
During 2019, we actively committed funds to developing our commercialization program for Firdapse
®
and we have continued to incur commercialization expenses, including sales, marketing, patient services, patient advocacy and other commercialization related expenses, as we have continued our sales program for Firdapse
®
.
Our general and administrative expenses consist primarily of salaries and personnel expenses for accounting, corporate, compliance, and administrative functions. Other costs include administrative facility costs, regulatory fees, insurance, and professional fees for legal, information technology, accounting, and consulting services.
Stock-Based Compensation.
We recognize expense for the fair value of all stock-based awards to employees, directors, and consultants in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). For stock options, we use the Black-Scholes option valuation model in calculating the fair value of the awards.
Income Taxes.
Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes.
We are currently conducting a study of the availability for use of our net operating loss carryforwards and other credits under Section 382 of the Internal Revenue Code, and the results of this study could impact the amounts of net operating losses and other credits that we have available for use in future periods, and the timing of their use.
 
28

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.
Non-GAAP
Financial Measures.
We prepare our consolidated financial statements and notes thereto which accompany this report in accordance with U.S. GAAP. To supplement our financial results presented on a U.S. GAAP basis, we may use
non-GAAP
financial measures in our reports filed with the Commission and/or our communications with investors.
Non-GAAP
measures are provided as additional information and not as an alternative to our consolidated financial statements presented in accordance with GAAP. Our
non-GAAP
financial measures are intended to enhance an overall understanding of our current financial performance. We believe that the
non-GAAP
financial measures we present provide investors and prospective investors with an alternative method for assessing our operating results in a manner that we believe is focused on the performance of ongoing operations and provide a more consistent basis for comparison between periods.
The
non-GAAP
financial measure that we present excludes from the calculation of net income the
non-cash
expense associated with stock-based compensation. Further, we often report
non-GAAP
net income (loss) per share, which is calculated by dividing
non-GAAP
net income (loss) by the weighted average common shares outstanding.
Any
non-GAAP
financial measures that we report should not be considered in isolation or as a substitute for comparable U.S. GAAP accounting, and investors should read them in conjunction with our financial statements and notes thereto prepared in accordance with U.S. GAAP. Finally, the
non-GAAP
measures of net income (loss) we may use may be different from, and not directly comparable to, similarly titled measures used by other companies.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. For a full discussion of our accounting policies, please refer to Note 2 on the Financial Statements included in our 2019 Annual Report on Form
10-K
filed with the SEC. Our most critical accounting policies and estimates include: revenue recognition, leases, accounting for research and development expenses, 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
of our 2019 Annual Report on Form
10-K.
Results of Operations
Revenues
.
For the three and
six-month
periods ended June 30, 2020, we recognized approximately $29.6 million and $58.7 million, respectively, in net revenue from product sales from Firdapse
®
compared to approximately $28.8 million and $41.3 million for the three and
six-month
periods ended June 30, 2019. We had no revenues from our collaborative arrangement for the three and
six-month
periods ended June 30, 2020 and 2019.
Cost of Sales.
Cost of sales was approximately $4.1 million and $8.3 million for the three and
six-months
ended June 30, 2020 compared to approximately $4.3 million and $6.0 million for the three and
six-months
ended June 30, 2019. Cost of sales consists principally of royalty payments which are based on net revenue as defined in the applicable license agreement. Further, cost of sales may be artificially low until we fully utilize product manufactured that was recorded as expense prior to FDA approval of Firdapse
®
.
 
29

Research and Development Expenses
.
Research and development expenses for the three-month periods ended June 30, 2020 and 2019 were approximately $4.3 million and $4.6 million, respectively, and represented approximately 22.5% and 25.9% of total operating costs and expenses, respectively. Research and development expenses for the three months ended June 30, 2020 and 2019 were as follows:
 
    
Three months ended
June 30,
    
Change
 
    
2020
    
2019
    
$
    
%
 
Research and development expenses
   $ 3,928,423      $ 4,356,152        (427,729      (9.8
Employee stock-based compensation
     421,220        273,212        148,008        54.2  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total research and development expenses
   $ 4,349,643      $ 4,629,364        (279,721      (6.0
  
 
 
    
 
 
    
 
 
    
 
 
 
Research and development expenses for the
six-month
periods ended June 30, 2020 and 2019 were approximately $8.6 million and $7.9 million, respectively, and represented approximately 22.7% and 25.3% of total operating costs and expenses for the
six-month
periods ended June 30, 2020 and 2019, respectively. Research and development expenses for the six months ended June 30, 2020 and 2019 were as follows:
 
    
Six months ended
June 30,
    
Change
 
    
2020
    
2019
    
$
    
%
 
Research and development expenses
   $ 7,733,181      $ 7,376,390        356,791        4.8  
Employee stock-based compensation
     839,273        560,933        278,340        49.6  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total research and development expenses
   $ 8,572,454      $ 7,937,323        635,131        8.0  
  
 
 
    
 
 
    
 
 
    
 
 
 
For the three and six months ended June 30, 2020, research and development expenses decreased approximately $0.3 million and increased approximately $0.6 million, respectively, compared to the same period in 2019, primarily attributable to the following:
 
   
increases in headcount, medical and regulatory affairs and quality assurance expenses and expenses from our ongoing clinical trials evaluating Firdapse
®
for the treatment of
MuSK-MG,
and our
proof-of-concept
trial evaluating Firdapse
®
for the treatment of SMA Type 3; and
 
   
increases in employee stock-based compensation which is
non-cash
and relates to the expense of stock options awards to certain employees, due to increase in headcount.
We expect that research and development expenses will continue to be substantial in 2020 as we continue our clinical program evaluating Firdapse
®
for the treatment of
MuSK-MG,
continue our
proof-of-concept
trial for SMA Type 3, continue our Expanded Access Program, take steps to develop a sustained release formulation of Firdapse
®
, continue our regulatory path to seek approval of Firdapse
®
in Japan, and begin to evaluate Firdapse
®
as a treatment for other neuromuscular diseases.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses for the three months ended June 30, 2020 and 2019 were approximately $10.8 million and $9.0 million, respectively, and represented 56.1% and 50.3% of total operating costs and expenses for the three months ended June 30, 2020 and 2019, respectively. Selling, general and administrative expenses for the three months ended June 30, 2020 and 2019 were as follows:
 
    
Three months ended
June 30,
    
Change
 
    
2020
    
2019
    
$
    
%
 
Selling
   $ 5,621,780      $ 4,881,137        740,643        15.2  
General and administrative
     3,838,336        3,454,801        383,535        11.1  
Employee stock-based compensation
     1,373,242        651,784        721,458        110.7  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total selling, general and administrative expenses
   $ 10,833,358      $ 8,987,722        1,845,636        20.5  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
30

Selling, general and administrative expenses for the six months ended June 30, 2020 and 2019 were approximately $20.9 million and $17.4 million, respectively, and represented 55.3% and 55.6% of total operating costs and expenses for the six months ended June 30, 2020 and 2019, respectively. Selling, general and administrative expenses for the six months ended June 30, 2020 and 2019 were as follows:
 
    
Six months ended
June 30,
    
Change
 
    
2020
    
2019
    
$
    
%
 
Selling
   $ 11,425,925      $ 9,985,045        1,440,880        14.4  
General and administrative
     6,995,941        6,121,663        874,278        14.3  
Employee stock-based compensation
     2,474,540        1,297,474        1,177,066        90.7  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total selling, general and administrative expenses
   $ 20,896,406      $ 17,404,182        3,492,224        20.1  
  
 
 
    
 
 
    
 
 
    
 
 
 
For the three and six months ended June 30, 2020, selling, general and administrative expenses increased approximately $1.8 million and $3.5 million, respectively, compared to the same periods in 2019, primarily attributable to the following:
 
   
increases in selling (commercialization) expenses, which consist primarily of the costs of our expansion of the sales force and the cost of contracting with a rare-disease experience inside sales agency;