Form 10-Q
Table of Contents
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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, 2021
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 801
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 102,978,461 shares of common stock, $0.001 par value per share, were outstanding as of August 5, 2021.
 
 
 

Table of Contents
CATALYST PHARMACEUTICALS, INC.
INDEX
 
 
 
PART I. FINANCIAL INFORMATION
  
 
 
Item 1.
 
FINANCIAL STATEMENTS
  
 
  
 
3
 
 
  
 
4
 
 
  
 
5
 
 
  
 
6
 
 
  
 
7
 
Item 2.
 
  
 
24
 
Item 3.
 
  
 
35
 
Item 4.
 
  
 
36
 
 
 
PART II. OTHER INFORMATION
  
 
 
Item 1.
 
  
 
36
 
Item 1A.
 
  
 
37
 
Item 2.
 
  
 
38
 
Item 3.
 
  
 
38
 
Item 4.
 
  
 
38
 
Item 5.
 
  
 
38
 
Item 6.
 
  
 
38
 
  
 
39
 
 
2

Table of Contents
CATALYST PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
    
June 30,
2021
   
December 31,
2020
 
    
(unaudited)
       
ASSETS
                
Current Assets:
                
Cash and cash equivalents
   $ 135,295     $ 130,237  
Short-term investments
     19,980       10,041  
Accounts receivable, net
     6,292       5,987  
Inventory
     7,097       4,651  
Prepaid expenses and other current assets
     7,641       8,328  
    
 
 
   
 
 
 
Total current assets
     176,305       159,244  
Operating lease
right-of-use
asset
     3,201       —    
Property and equipment, net
     914       130  
Deferred tax assets
     28,701       32,971  
Deposits
     9       9  
    
 
 
   
 
 
 
Total assets
   $ 209,130     $ 192,354  
    
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current Liabilities:
                
Accounts payable
   $ 2,924     $ 4,256  
Accrued expenses and other liabilities
     13,211       18,500  
    
 
 
   
 
 
 
Total current liabilities
     16,135       22,756  
Operating lease liability, net of current portion
     4,051       —    
    
 
 
   
 
 
 
Total liabilities
     20,186       22,756  
Commitments and contingencies (Note 10)
            
Stockholders’ equity:
                
Preferred stock, $0.001 par value, 5,000,000 shares authorized: none issued and outstanding at June 30, 2021 and December 31, 2020
              —    
Common stock, $0.001 par value, 200,000,000 shares authorized; 103,162,041
 
shares and 103,781,641
shares
issued and
outstanding at June 30, 2021 and December 31, 2020, respectively
103   104  
Additional
paid-in
capital
     226,699       223,168  
Accumulated deficit
     (37,821 )     (53,705
Accumulated other comprehensive income (loss)
     (37     31  
    
 
 
   
 
 
 
Total stockholders’ equity
     188,944       169,598  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 209,130     $ 192,354  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

Table of Contents
CATALYST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)
(in thousands, except share data)
 
    
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
    
2021
    
2020
   
2021
   
2020
 
Revenues:
                                 
Product revenue, net
   $ 33,636      $ 29,605     $ 63,841     $ 58,741  
License and other revenue
     2,729        —         2,729       —    
    
 
 
    
 
 
   
 
 
   
 
 
 
Total revenues
     36,365        29,605       66,570       58,741  
    
 
 
    
 
 
   
 
 
   
 
 
 
Operating costs and expenses:
                                 
Cost of sales
     4,545        4,140       9,226       8,291  
Research and development
     4,450        4,350       7,457       8,573  
Selling, general and administrative
     11,532        10,833       24,248       20,896  
    
 
 
    
 
 
   
 
 
   
 
 
 
Total operating costs and expenses
     20,527        19,323       40,931       37,760  
    
 
 
    
 
 
   
 
 
   
 
 
 
Operating income
     15,838        10,282       25,639       20,981  
Other income, net
     62        111       143       448  
    
 
 
    
 
 
   
 
 
   
 
 
 
Net income before income taxes
     15,900        10,393       25,782       21,429  
Provision for income taxes
     3,719        613       5,938       1,223  
    
 
 
    
 
 
   
 
 
   
 
 
 
Net income
   $ 12,181      $ 9,780     $ 19,844     $ 20,206  
Net income per share:
                                 
Basic
   $ 0.12      $ 0.09     $ 0.19     $ 0.20  
    
 
 
    
 
 
   
 
 
   
 
 
 
Diluted
   $ 0.11      $ 0.09     $ 0.18     $ 0.19  
    
 
 
    
 
 
   
 
 
   
 
 
 
Weighted average shares outstanding:
                                 
Basic
     103,407,803        103,414,523       103,610,138       103,410,881  
    
 
 
    
 
 
   
 
 
   
 
 
 
Diluted
     107,734,924        106,730,423       107,299,262       106,433,862  
    
 
 
    
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
   $ 12,181      $ 9,780     $ 19,844     $ 20,206  
Other comprehensive income:
                                 
Unrealized gain (loss) on
available-for-sale
securities
     8        (85     (68     (11
    
 
 
    
 
 
   
 
 
   
 
 
 
Comprehensive income
   $ 12,189      $ 9,695     $ 19,776     $ 20,195  
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
4

Table of Contents
CATALYST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
For the three and six months ended June 30, 2021 and 2020
(in thousands)
 
    
Preferred
Stock
    
Common Stock
   
Additional

Paid-in

Capital
   
Accumulated
Deficit
   
Accumulated

Other

Comprehensive
Gain (Loss)
   
Total
 
    
Shares
   
Amount
 
Balance at December 31, 2020
   $        103,782     $ 104     $ 223,168     $ (53,705   $ 31     $ 169,598  
Issuance of stock options for services
                        1,442                   1,442  
Exercise of stock options for common stock
            90             188                   188  
Amortization of restricted stock for services
                        129                   129  
Repurchase of common stock
            (67                 (293           (293
Other comprehensive gain (loss)
                                    (76     (76
Net income
                              7,663             7,663  
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2021
            103,805       104       224,927       (46,335     (45     178,651  
Issuance of stock options for services
                        1,388                   1,388  
Exercise of stock options for common stock
            83             271                   271  
Amortization of restricted stock for services
                        130                   130  
Repurchase of common stock
            (733     (1           (3,667           (3,668
Issuance of common stock upon vesting of restricted stock units, net
            7             (17                 (17
Other comprehensive gain (loss)
                                    8       8  
Net income
                              12,181             12,181  
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2021
   $        103,162     $ 103     $ 226,699     $ (37,821   $ (37   $ 188,944  
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Preferred
Stock
    
Common Stock
    
Additional

Paid-in

Capital
    
Accumulated
Deficit
   
Accumulated

Other

Comprehensive
Gain (Loss)
   
Total
 
    
Shares
    
Amount
 
Balance at December 31, 2019
   $        103,397      $ 103      $ 216,206      $ (128,689   $ 10     $ 87,630  
Issuance of stock options for services
                          1,384                    1,384  
Exercise of stock options for common stock
            12               26                    26  
Amortization of restricted stock for services
                          136                    136  
Other comprehensive gain (loss)
                                       74       74  
Net income
                                 10,426             10,426  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at March 31, 2020
            103,409        103        217,752        (118,263     84       99,676  
Issuance of stock options for services
                          1,627                    1,627  
Exercise of stock options for common stock
            13               36                    36  
Amortization of restricted stock for services
                          167                    167  
Other comprehensive gain (loss)
                                       (85     (85
Net income
                                 9,780             9,780  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
   $        103,422      $ 103      $ 219,582      $ (108,483   $ (1   $ 111,201  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

Table of Contents
CATALYST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
 
    
For the Six Months Ended
June 30,
 
    
2021
   
2020
 
Operating Activities:
                
Net income
   $ 19,844     $ 20,206  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                
Depreciation
     128       43  
Stock-based compensation
     3,089       3,314  
Deferred taxes
     4,270       —    
Change in accrued interest and accretion of discount on investments
     (6     (4
Reduction in the carrying amount of right-of-use asset
     108       721  
(Increase) decrease in:
                
Accounts receivable, net
     (305     3,775  
Inventory
     (2,446     129  
Prepaid expenses and other current assets and deposits
     687       (3,170
Increase (decrease) in:
                
Accounts payable
     (1,332     1,687  
Accrued expenses and other liabilities
     (5,490     (5,473
Operating lease liability
     942       (750
    
 
 
   
 
 
 
Net cash provided by (used in) operating activities
     19,489       20,478  
Investing Activities:
                
Purchases of property and equipment
     (912     —    
Purchases of investments
     (10,000     —    
Proceeds from maturities and sales of investments
     —         5,000  
    
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     (10,912     5,000  
Financing Activities:
                
Payment of employee withholding tax related to stock-based compensation
     (17     —    
Proceeds from exercise of stock options
     459       62  
Repurchase of common stock
     (3,961     —    
    
 
 
   
 
 
 
Net cash provided by (used in) financing activities
     (3,519     62  
    
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     5,058       25,540  
Cash and cash equivalents—beginning of period
     130,237       89,512  
    
 
 
   
 
 
 
Cash and cash equivalents—end of period
   $ 135,295     $ 115,052  
    
 
 
   
 
 
 
Supplemental disclosures of cash flow information:
                
Cash paid for income taxes
   $
341
    $ 50  
Non-cash
investing and financing activities:
                
Unrealized gain (loss) on
available-for-sale
securities
   $ (68   $ (11
Operating lease liabilities arising from obtaining
right-of-use
assets
   $ 3,309     $ —    
The accompanying notes are an integral part of these consolidated financial statements.
 
6

Table of Contents
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 patient-centric biopharmaceutical company focused on
in-licensing,
developing and commercializing novel high-quality medicines for patients living with rare diseases.
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.
On August 6, 2020, the Company announced that Canada’s national healthcare regulatory agency, Health Canada, has approved Firdapse
®
for the treatment of adult patients in Canada with LEMS. On October 28, 2020, the Company launched Firdapse
®
in Canada for the treatment of patients with LEMS through a license and supply agreement with KYE Pharmaceuticals.
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 until the second quarter of 2019, when it started reporting net income. The Company has been able to fund its cash needs to date through offerings of its securities and revenues from sales of its product. See Note 13 (Stockholders’ Equity).
Capital Resources
While there can be no assurance, based on currently available information, the Company estimates that it has sufficient resources to support its planned operations for at least the next 12 months from the issuance date of this Form
10-Q.
The Company may raise 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 drug 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 and if 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 numerous aspects of the coronavirus
(COVID-19)
pandemic that have adversely affected the Company’s business since the beginning of the pandemic. The Company closely monitors the impact of the pandemic on all aspects of its business and takes steps, wherever possible, to lessen those impacts. However, the Company is unable to predict the impact that the coronavirus pandemic will have on its business in future periods.
 
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, 2020 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, 2020 included in the 2020 Annual Report on
Form 10-K
filed by the Company with the SEC. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for any future period or for the full 2021 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 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, 2021 and December 31, 2020, investments consisted of short-term bond funds and U.S. Treasuries. Such investments are not insured by the Federal Deposit Insurance Corporation.
The short-term bond funds and U.S. Treasuries held at June 30, 2021 are classified as
available-for-sale
securities. The short-term bond funds are classified as current assets, which reflects management’s intention to use the proceeds from the sale of these investments to fund the Company’s operations, as necessary. The Company classifies U.S. Treasuries with stated maturities of greater than three months and less than one year in short-term investments, U.S. Treasuries with stated maturities greater than one year are classified as
non-current
investments in its consolidated balance sheets. There are no
non-current
investments as of June 30, 2021 and December 31, 2020.
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. 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).
 
 
 
f.
ACCOUNTS RECEIVABLE, NET.
Accounts receivable is recorded net of customer allowance for distribution fees, trade discounts, prompt payment discounts, chargebacks and expected credit losses. 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, 2021 and December 31, 2020, the Company determined that an allowance for expected credit losses was not required. No accounts were written off during the periods presented.
 
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Table of Contents
2.
Basis of Presentation and Significant
 
Accounting Policies (continued).
 
 
g.
INVENTORY.
Inventories are stated at the lower of cost or net realizable value. Inventories consist of raw materials,
work-in-process
and finished goods. Costs to be capitalized as inventories primarily include third party manufacturing costs and other overhead costs. Cost is determined using a standard cost method, which approximates actual cost, and assumes a
first-in,
first out (FIFO) flow of goods. 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. 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, 2021 inventory consisted of raw materials,
work-in
process and finished goods. As of December 31, 2020, 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 manufacturing, prepaid tax, prepaid insurance, prepaid subscription fees, prepaid research fees, prepaid commercialization expenses, and amounts due from collaborative and license arrangements. 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 payable and accrued expenses and other liabilities. At June 30, 2021 and December 31, 2020, 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).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
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Table of Contents
2.
Basis of Presentation and Significant Accounting Policies (continued).
 
    
Fair Value Measurements at Reporting Date Using (in thousands)
 
    
Balances
as of
June 30,
2021
    
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
   $ 68,663      $ 68,663      $      $  
    
 
 
    
 
 
    
 
 
    
 
 
 
U.S. Treasuries
   $ 49,996      $ 49,996      $      $  
    
 
 
    
 
 
    
 
 
    
 
 
 
Short-term investments:
                                   
Short-term bond funds
   $ 19,980      $ 19,980      $      $  
    
 
 
    
 
 
    
 
 
    
 
 
 
         
    
Balances
as of
December 31,
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
   $ 15,674      $ 15,674      $      $  
    
 
 
    
 
 
    
 
 
    
 
 
 
U.S. Treasuries
   $ 104,994      $      $ 104,994      $  
    
 
 
    
 
 
    
 
 
    
 
 
 
Short-term investments:
                                   
Short-term bond funds
   $ 10,041      $ 10,041      $      $  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
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 lease does 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 term includes options to extend or terminate the lease, however, these options are not considered in the lease term as the Company 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 a lease agreement with lease and
non-lease
components, which are accounted for separately.
 
 
l.
SHARE REPURCHASES.
In March 2021, the Company’s Board of Directors approved a share repurchase program that authorizes the repurchase of up to $40 million of the Company’s common stock.
The Company accounts for share repurchases by charging the excess of
 the
repurchase price over the repurchased common stock’s par value entirely to accumulated deficit. All repurchased shares are retired and become authorized but unissued shares. The Company accrues for the shares purchased under the share repurchase plan based on the trade date. The Company may terminate or modify its share repurchase program at any time.
 
 
m.
REVENUE RECOGNITION.
Product Revenues:
The Company recognizes revenue when its customer obtains title of the promised goods, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for these goods. 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”), which 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
®
.
 
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Table of Contents
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 collaborative and license agreements. Collaborative and license agreement payments may include nonrefundable fees at the inception of the agreements, contingent payments for specific achievements designated in the agreements, and/or net profit-sharing payments on sales of products resulting from the collaborative and license arrangements. For a complete discussion of accounting for collaborative and licensing arrangements, see Revenues from Collaboration and Licensing Arrangements 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 or upon dispense to patient). 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 months ended June 30, 2021 and 2020.
During the three and six months ended June 30, 2021 and 2020, all of the Company’s sales of Firdapse
®
in the United States were to its Customer.
Reserves for Variable Consideration:
Revenue from product sales is 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, prompt payment discounts, 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.
 
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Table of Contents
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 contemplates 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, 2021 and, therefore, the transaction price was not reduced further during the three and six months ended June 30, 2021 and 2020. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances:
The Company provides its Customer with a discount that is explicitly stated in its contract and is recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company receives sales order management, transactional 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. 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 through June 30, 2021 and
June 30,
2020, as well as a reduction to accounts receivable, net on the consolidated balance sheets.
Prompt Payment Discounts:
The Company provides its Customer with prompt payment discounts which may result in adjustments to the price that is invoiced for the product transferred, in the case that payments are made within a defined period. The prompt payment discount reserve is based on actual invoice sales and contractual discount rates. Reserves for prompt payment discounts are included in 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 third-party vendor 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 primarily of chargebacks that the Customer has claimed, but for which the Company has not yet issued a credit.
 
12

Table of Contents
2.
Basis of Presentation
 
and Significant Accounting Policies (continued).
 
Government Rebates:
The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses and other current liabilities on the consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
Bridge and Patient Assistance Programs:
The Company provides Firdapse
®
free of charge 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 Firdapse
®
free of charge 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.
Revenues from Collaboration and Licensing Arrangements:
The Company analyzes license and collaboration arrangements pursuant to FASB ASC Topic 808, Collaborative Arrangement Guidance and Consideration, (“ASC 808”) to assess whether such arrangements, or transactions between arrangement participants, involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities or are more akin to a vendor-customer relationship. In making this evaluation, the Company considers whether the activities of the collaboration are considered to be distinct and deemed to be within the scope of the collaborative arrangement guidance or if they are more reflective of a vendor-customer relationship and, therefore, within the scope of FASB ASC Topic 606, Revenue from Contracts with Customers. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.
For elements of collaboration arrangements that are not accounted for pursuant to guidance in
Topic
 606, an appropriate recognition method is determined and applied consistently, generally by analogy to the revenue from contracts with customers guidance.
Pursuant to
Topic
 606, for arrangements or transactions between arrangement participants determined to be within the scope of the contracts with customers guidance, the Company performs the following steps to determine the appropriate amount of revenue to be recognized as the Company fulfills its obligations: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company evaluates the performance obligations promised in the contract that are based on goods and services that will be transferred to the customer and determines whether those obligations are both (i) capable of being distinct and (ii) distinct in the context of the contract. Goods or services that meet these criteria are considered distinct performance obligations. The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration may include fixed consideration or variable consideration.
 
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Table of Contents
2.
Basis of Presentation and Significant Accounting Policies (continued).
 
The agreements provide for milestone payments upon achievement of development and regulatory events. The Company accounts for milestone payments as variable consideration in accordance with Topic 606. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of potential transaction price and the likelihood that the transaction price will be received. The Company utilizes either the most likely amount method or expected value method to estimate the amount expected to be received based on which method best predicts the amount expected to be received. The amount of variable consideration that is included in the transaction price may be constrained and is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and, if so, these options are considered performance obligations.
Revenue is recognized when, or as, the Company satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when, or as, the customer obtains control of that asset.
After contract inception, the transaction price is reassessed at every period end and updated for changes such as resolution of uncertain events. Any change in the overall transaction price is allocated to the performance obligations based on the same methodology used at contract inception.
The Company recognizes sales-based royalties or net profit-sharing when the later of (a) the subsequent sale occurs, or (b) the performance obligation to which the sales-based royalty or net profit-sharing has been satisfied.
Payments to and from the collaborator are presented in the statement of operations based on the nature of the Company’s business operations, the nature of the arrangement, including the contractual terms, and the nature of the payments.
Refer to Note 9 (Collaboration and Licensing Arrangements), for further discussion on the Company’s collaborative and licensing arrangements.
 
 
n.
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.
 
 
o.
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 three years. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur.
 
 
p.
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 SPs. Therefore, its distributor and SPs 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
®
.
 
14

Table of Contents
2.
Basis of Presentation and Significant Accounting Policies (continued).
 
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.
 
 
q.
ROYALTIES.
Royalties incurred in connection with the Company’s license agreement, as disclosed in Note 11 (Agreements), are expensed to cost of sales as revenue from product sales is recognized.
 
 
r.
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 2017. 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.
 
 
 
s.
COMPREHENSIVE INCOME.
U.S. GAAP requires that all components of comprehensive income be reported in the financial statements in the period in which they are recognized. Comprehensive income is net income, plus certain other items that are recorded directly into stockholders’ equity. The Company’s comprehensive income is shown on the consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2021 and 2020, and is comprised of net unrealized gains (losses) on the Company’s
available-for-sale
securities.
 
 
t.
NET INCOME PER COMMON SHARE.
Basic net income per share is computed by dividing net income 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 per common share is computed by dividing net income 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,
 
    
2021
    
2020
    
2021
    
2020
 
Basic weighted average common shares outstanding
     103,407,803        103,414,523        103,610,138        103,410,881  
Effect of dilutive securities
     4,327,121        3,315,900        3,689,124        3,022,981  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted weighted average common shares outstanding
     107,734,924        106,730,423        107,299,262        106,433,862  
    
 
 
    
 
 
    
 
 
    
 
 
 
Outstanding common stock equivalents totaling approximately 4.9 million and 5.1 million, were excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2021 as their effect would be anti-dilutive. For the three and six months ended June 30, 2020, approximately 3.5 million and 4.8 million shares of common stock equivalents were excluded from the calculation of diluted net income per common share as their effect would be anti-dilutive.
 
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2.
Basis of Presentation and Significant Accounting Policies (continued).
 
 
u.
RECLASSIFICATIONS.
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.
 
 
v.
RECENTLY ISSUED ACCOUNTING STANDARDS.
In December 2019, the FASB issued ASU
2019-12,
Income Taxes: Simplifying the Accounting for Income Taxes
, a new standard intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a
step-up
in the tax basis of goodwill. The standard was effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard required certain changes to be made prospectively, with some changes to be made retrospectively. The Company adopted the new standard on January 1, 2021. 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 (in thousands):
 
    
Estimated
Fair
Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Amortized
Cost
 
At June 30, 2021:
                                   
U.S. Treasuries – Cash equivalents
   $ 49,996      $      $
(1
)
   $ 49,997  
Short-term bond funds
     19,980        —          (36      20,016  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 69,976      $      $ (37    $ 70,013  
    
 
 
    
 
 
    
 
 
    
 
 
 
At December 31, 2020:
                                   
U.S. Treasuries – Cash equivalents
   $ 104,994      $ 2      $ —        $ 104,992  
Short-term bond funds
     10,041        29        —          10,012  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 115,035      $ 31      $ —        $ 115,004  
    
 
 
    
 
 
    
 
 
    
 
 
 
There were no realized gains or losses from
available-for-sale
securities for the three or six months ended June 30, 2021 or 2020.
The estimated fair values of
available-for-sale
securities at June 30, 2021, by contractual maturity, are summarized as follows (in thousands):
    
June 30, 2021
 
Due in one year or less
   $ 69,976  
 
4.
Inventory, net.
Inventory, net consists of the following (in thousands): 
 
 
  
June 30, 2021
 
  
December 31, 2020
 
Raw materials
   $ 1,117      $ —    
Work-in-process
     5,168        3,555  
Finished goods
     812        1,096  
    
 
 
    
 
 
 
Total inventory, net
  
$
                7,097
     $ 4,651  
    
 
 
    
 
 
 
 
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5.
Prepaid Expenses and
 
Other Current Assets.
Prepaid expenses and other current assets consist of the following (in thousands):
 
    
   June 30, 2021   
    
December 31, 2020
 
Prepaid manufacturing costs
   $ 2,646      $ 3,328  
Prepaid tax
     93        1,368  
Prepaid insurance
     623        1,285  
Prepaid subscription fees
     530        729  
Prepaid research fees
     391        453  
Prepaid commercialization expenses
     120        199  
Due from collaborative and licensing arrangements
     2,917        437  
Other
     321        529  
    
 
 
    
 
 
 
Total prepaid expenses and other current assets
   $ 7,641      $ 8,328  
    
 
 
    
 
 
 
 
6.
Operating Lease.
The Company has an operating lease agreement for its corporate office. The lease includes an option to extend the lease for up to 5 years and options to terminate the lease within 6 and 7.6 years. 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 increased from approximately 7,800 square feet of space to approximately 10,700 square feet of space. The amended lease commenced in March 2021 when construction of the asset was completed and space became available for use. Consequently, the Company recorded the effects of the amended lease during Q1 2021.
The components of lease expense were as follows (in thousands):
 
    
For the three
months
ended

June 30, 2021
    
For the six
months
ended

June 30, 2021
 
Operating lease cost
   $ 108      $ 164  
Supplemental cash flow information related to leases was as follows:
 
 
  
June 30, 2021
 
Cash paid for amounts included in the measurement of lease liabilities:
        
Operating cash flows
   $ 29  
Right-of-use
assets obtained in exchange for lease obligations:
        
Operating leases
   $ 36
     
Supplemental balance sheet information related to leases was as follows:
 
Operating lease
right-of-use
assets
   $
 
 
 
3,201  
    
 
 
 
Other current liabilities
   $ 200  
Operating lease liabilities, net of current portion
     4,051  
    
 
 
 
Total operating lease liabilities
   $ 4,251  
    
 
 
 
   
Remaining lease term
    
9.8 years
 
Discount rate
     4.51
 
17

6.
Operating Lease (continued).
 
Remaining payments of lease liabilities as of June 30, 2021 were as follows (in thousands):
 
2021 (remaining
six
 months)
   $ 80  
2022
     492  
2023
     506  
2024
     522  
2025
     537  
Thereafter
     3,150  
    
 
 
 
Total lease payments
     5,287  
Less imputed interest
     (1,036
    
 
 
 
Total
   $ 4,251  
    
 
 
 
Rent expense was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2021
, respec
tively,
 and $0.1 million and $0.2 million for the three and six months ended June 30, 2020
, respectively.
 
7.
Property and Equipment, net.
Property and equipment, net consists of the following (in thousands):
 
 
  
June 30, 2021
 
  
December 31, 2020
 
Computer equipment
   $ 51      $ 51  
Furniture and equipment
     135        242  
Leasehold improvements
     939        177  
Less: Accumulated depreciation
     (211      (340
    
 
 
    
 
 
 
Total property and equipment, net
   $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
914
     $ 130  
    
 
 
    
 
 
 
 
8.
Accrued Expenses and Other Liabilities.
Accrued expenses and other liabilities consist of the following (in thousands):
 
    
June 30, 2021
    
December 31, 2020
 
Accrued preclinical and clinical trial expenses
   $ 530
 
 
   $ 585  
Accrued professional fees
     1,229        1,884  
Accrued compensation and benefits
     2,014        3,991  
Accrued license fees
     6,382        10,373  
Accrued purchases
     1,343        258  
Accrued contributions
     —          310  
Operating lease liability
     200        29  
Accrued variable consideration
     1,331        964  
Accrued income tax
     70        —    
Other
    
112
       106  
    
 
 
    
 
 
 
Current accrued expenses and other liabilities
     13,211        18,500  
    
 
 
    
 
 
 
Lease
liability—non-current
     4,051        —    
    
 
 
    
 
 
 
Non-current
accrued expenses and other liabilities
     4,051        —    
    
 
 
    
 
 
 
Total accrued expenses and other liabilities
  
$
              17,262
     $ 18,500  
    
 
 
    
 
 
 
 
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9.
Collaboration
 
and Licensing Arrangements.
Endo
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 Company evaluated the license agreement with Endo to determine whether it is a collaborative arrangement for purposes of ASC 808. As the Company shares in the significant risks and rewards, the Company has concluded that this is a collaborative arrangement. As developing a final finished dosage form of a generic product in exchange for consideration is not an output of the Company’s ongoing activities, Endo does not represent a contract with a customer. However, Topic 808 does not provide guidance on the recognition of consideration exchanged or accounting for the obligations that may arise between the parties. The Company concluded that ASC Topic 730,
Research and Development
, should be applied by analogy to payments between the parties during the development activities and ASC 606
for the milestone payment and sharing of defined net profits upon commercialization.
The collaborative agreement included a nonrefundable upfront license fee that was recognized upon receipt following execution of the collaborative arrangement for vigabatrin tablets.
The collaborative agreement provides for a $2.0 million milestone payment on the commercial launch of the product by Par. As of June 30, 2021 and 2020, no milestone payments have been earned.
There were no revenues from this collaborative arrangement for the three or six months ended June 30, 2021 or 2020. Total
expenses incurred, net, in connection with the collaborative agreement for the three and six months ended June 30, 2021 were approximately $45,000. 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. These expenses have been included in research and development expenses in the accompanying consolidated statements of operations and comprehensive income.
KYE Pharmaceuticals
In August 2020, the Company entered into a collaboration and license agreement with KYE Pharmaceuticals Inc (KYE), for the commercialization of Firdapse
®
in Canada.
Under the agreement, Catalyst granted KYE an exclusive license to commercialize and market Firdapse
®
in Canada. KYE assumes all selling and marketing costs under the collaboration, while the Company is responsible for supply of Firdapse
®
based on the collaboration partner’s purchase orders.
Under the terms of the agreement, the Company will receive an
up-front
payment, received payment upon transfer of Marketing Authorization and delivery of commercial product, received payment for supply of Firdapse
®
, will receive milestone payments, and a sharing of defined net profits upon commercialization from KYE consisting of a
mid-double-digit
percent of net sales of Firdapse
®
. 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 in Canada.
Although this agreement is in form identified as a collaborative agreement, the Company has concluded for accounting purposes that it represents a contract with a customer. This is because the Company grants to KYE a license and provides supply of Firdapse
®
in exchange for consideration, which are outputs of the Company’s ongoing activities. Accordingly, the Company has concluded that this collaborative arrangement will be accounted for pursuant to ASC 606.
The collaborative agreement included a nonrefundable upfront license fee that was recognized upon transfer of the license based on a determination that the right is provided as the intellectual property exists at the point in time in which the license is granted.
 
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Table of Contents
9.
Collaboration and Licensing Arrangements (continued).
 
Under the arrangement, the Company will receive profit-sharing reports within nine days after quarter end from the collaborator. Revenue from sales of collaboration products by the Company’s collaborator will be recognized in the quarter in which the sales occurred.
Revenues
 from the arrangement with KYE for the three or six months ended
June 30, 2021 were not material.
Total expenses incurred, net, in connection with the agreement with KYE for the three and six months ended June 30, 2021 were approximately $2,000 and $40,000. These expenses have been included in selling, general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income.
DyDo Pharma, Inc.
On June 28, 2021, the Company entered into a license agreement with DyDo Pharma, Inc. (DyDo), for the development and commercialization of Firdapse
®
in Japan.
Under the agreement, DyDo will have joint rights to develop Firdapse
®
, and exclusive rights to commercialize the product, in Japan. DyDo will be responsible for funding all clinical, regulatory, marketing and commercialization activities in Japan, while the Company is responsible for clinical and commercial supply based on purchase orders, as well as providing support to DyDo in its efforts to obtain regulatory approval for the product from the Jap
a
nese regulatory authorities.
Under the terms of the agreement, the Company has earned an
up-front
payment and may earn further development and sales milestones for Firdapse
®
, as well as revenue on product supplied to DyDo.
The Company has concluded that this license agreement will be accounted for pursuant to ASC 606. The agreement included a nonrefundable upfront license fee that was recognized upon the effective date of the agreement as the intellectual property exists at the point in time in which the right to the license is granted. The Company determined the granting of the right to the license is distinct from the supply of Firdapse
®
and represents a separate performance obligation in the agreement.
Additionally, the agreement includes sales-based milestones in which the license is deemed to be the predominant item to which these milestones relate. Revenue will be recognized when the later of (a) the subsequent sale occurs, or (b) the performance obligation to which the sales-based royalty has been satisfied. Variable consideration related to regulatory milestones is fully constrained and only recognized when the uncertainty is subsequently resolved. For clinical and commercial supply of the product, the Company will recognize revenue when the Customer obtains control of the Company’s product, which will occur at a point in time which is generally at time of shipment.
Revenue from the arrangement with DyDo for the three and six months ended June 30, 2021 was approximately $2.7 million
relating to the nonrefundable upfront license fee, and
is included in license and other revenue in the accompanying consolidated statements of operations and comprehensive income. As of June 30, 2021, no milestone payments have been earned and there has been no clinical or commercial supply of Firdapse
®
.
 
10.
Commitments and Contingencies.
In May 2019, the FDA approved a New Drug Application (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
®
. While the NDA for Ruzurgi
®
only covers pediatric patients, the Company believes that Ruzurgi
®
is being prescribed
off-label
to adult LEMS patients. If Jacobus is able to successfully sell Ruzurgi
®
off-label
to adult LEMS patients, it could have a material adverse effect on 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, and Jacobus intervened in the case. The Company’s complaint, which was filed in the federal district court for the Southern District of Florida, alleged 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 sought an order vacating the FDA’s approval of Ruzurgi
®
.
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 judgment and deny the Company’s motion for summary judgment. On September 29, 2020, the District Judge adopted the Report and Recommendation of the Magistrate Judge, granted the FDA’s and Jacobus’s motions for summary judgment, and dismissed the Company’s case.
 
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10.
Commitments and
 
Contingencies (continued).
 
The Company has appealed the District Court’s decision to the Eleventh Circuit Court of Appeals. There can be no assurance as to the outcome of the Company’s appeal.
On August 10, 2020, Health Canada issued a Notice of Compliance (NOC) to Medunik for Ruzurgi
®
for the treatment of LEMS. The Company has since initiated a legal proceeding in Canada seeking judicial review of Health Canada’s decision to issue the NOC for Ruzurgi
®
as incorrect and unreasonable under Canadian law. Data protection, per Health Canada regulations, is supposed to prevent Health Canada from issuing a NOC to a drug that directly or indirectly references an innovative drug’s data, for eight years from the date of the innovative drug’s approval. The Ruzurgi
®
Product Monograph clearly references pivotal nonclinical carcinogenicity and reproductive toxicity data for amifampridine phosphate developed by the Company. As such, the Company believes that its data was relied upon to establish the nonclinical safety profile of Ruzurgi
®
needed to meet the standards of the Canadian Food and Drugs Act.
On June 3, 2021, the Company announced a positive decision in this proceeding that quashed the NOC previously issued for Ruzurgi
®
and remanded the matter to the Minister of Health to redetermine its decision to grant marketing authorization to Ruzurgi
®
in spite of Firdapse
®
’s data protection rights. However, on June 28, 2021, the Company announced that Health Canada had
re-issued
a NOC for Ruzurgi
®
, once again allowing the product to be marketed in Canada for patients with LEMS. There can be no assurance of the result of this proceeding. See Note 15 (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.
 
11.
Agreements.
 
 
a.
LICENSE AGREEMENT FOR 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 for the duration of any regulatory exclusivity within a territory and 3.5% for territories in any calendar year in territories without regulatory exclusivity.
On May 29, 2019, the Company and BioMarin entered into an amendment to the Company’s 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.
In 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.
 
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12.
Income Taxes.
The Company’s effective income tax rate was 23.0% and 5.7% for the
six
 months
 ended June 30, 2021 and 2020, respectively. The difference in the effective rates between periods is driven by the release of the Company’s valuation allowance against deferred taxes in the third quarter of 2020. Differences in the effective tax and the statutory federal income tax rate of
 21%
 
are driven by state income taxes and anticipated annual permanent differences, and offset by the orphan drug credit claimed.
The Company had no uncertain tax positions as of June 30, 2021 and December 31, 2020.
 
13.
Stockholders’ Equity.
Preferred Stock
The Company has 5,000,000 shares of authorized preferred stock, $0.001 par value per share, at June 30, 2021 and December 31, 2020. No shares of preferred stock were outstanding at June 30, 2021 and December 31, 2020.
Common Stock
The Company has 200,000,000 shares of authorized common stock, par value $0.001 per share. At June 30, 2021 and December 31, 2020, 103,162,041 and 103,781,641 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.
Share Repurchases
In March 2021, the Company’s Board of Directors approved a share repurchase program that authorizes the repurchase of up to $40 million of the Company’s common stock, pursuant to a repurchase plan under Rule
10b-18
of the Securities Act. The share repurchase program commenced on March 22, 2021 and, during the three and six months ended June 30, 2021, 732,951 and 800,000 shares were repurchased for an aggregate purchase price of approximately $3.7 million ($5.00 average price per share) and $4.0 million ($4.95 average price per share), respectively.
 
See Note 15 (Subsequent Events).
2020 Shelf Registration Statement
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.
 
14.
Stock Compensation.
For the three and six months ended June 30, 2021 and 2020, the Company recorded stock-based compensation expense as follows (in thousands):
 
    
Three months ended
June 30,
    
Six months ended
June 30,
 
    
2021
    
2020
    
2021
    
2020
 
Research and development
   $ 376      $ 421      $ 765      $ 839  
Selling, general and administrative
     1,142        1,373        2,324        2,475  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total stock-based compensation
   $ 1,518      $ 1,794      $ 3,089      $ 3,314  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
22

14.
Stock Compensation (continued).
 
Stock Options
As of June 30, 2021, there were outstanding stock options to purchase 13,759,670 shares of common stock, of which stock options to purchase 8,765,623 shares of common stock were exercisable as of June 30, 2021.
During the three and six months ended June 30, 2021, the Company granted seven-year term options to purchase an aggregate of 70,000 and 630,000 shares, respectively, of the Company’s common stock to employees. The Company recorded stock-based compensation related to stock options totaling $1.4 million and $2.8 million, respectively, during the three and six months ended June 30, 2021.
During the three and six months 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. The Company recorded stock-based compensation related to stock options totaling $1.6 million and $3.0 million, respectively, during the three and six months ended June 30, 2020.
During the three and six months ended June 30, 2021, options to purchase 83,332 shares and 173,330 shares, respectively, of the Company’s common stock were exercised, with proceeds of $270,523 and $458,818 respectively, to the Company.
During the three and six months 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.
As of June 30, 2021, there was approximately $8.3 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 2.08 years.
Restricted Stock Units
There were no grants of restricted stock units to employees or directors during the three or six months ended June 30, 2021. During the three and six months ended June 30, 2020, 30,000 restricted stock units were granted. During the three and six months ended June 30, 2021, the Company recorded
non-cash
stock-based compensation expense related to restricted stock units totaling $0.1 million and $0.3 million, respectively. During the three and six months ended June 30, 2020, the Company recorded
non-cash
stock-based compensation expense related to restricted stock units totaling $0.2 million and $0.3 million, respectively.
As of June 30, 2021, there was approximately $0.8 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 1.49 years.
 
15.
Subsequent
 
Events.
Subsequent to June 30, 2021, 199,746 shares of the Company’s common stock were repurchased under the Company’s stock repurchase plan. The shares were purchased at an average price of $5.48 per share for a total cost of $1.1 million.
During July 2021, as a result of Health Canada
re-issuing
an NOC for Ruzurgi
®
allowing the product to be marketed again in Canada for patients with LEMS, the Company along with KYE, filed a suit against Health Canada to overturn the Minister’s recent decision to approve Ruzurgi
®
. There can be no assurance as to the outcome of this proceeding.
 
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide an understanding of our financial condition, changes in financial condition and results of operations. The discussion and analysis is organized as follows:
 
 
 
Overview.
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 of fiscal 2021.
 
 
 
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 months ended June 30, 2021 as compared to the three and six month periods ended June 30, 2020.
 
 
 
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 commercial-stage patient centric biopharmaceutical company focused on
in-licensing,
developing and commercializing novel high-quality medicines for patients living with rare diseases. We are currently focusing our efforts on products that treat diseases in the neuromuscular and neurological space, but recently, our Board of Directors approved an expansion in our company’s strategic focus to include potentially acquiring or
in-licensing
innovative technology platforms and earlier stage programs in other rare disease therapeutic categories outside of neuromuscular diseases. To accomplish these new priorities, we are prepared to invest more heavily in research and development, including acquiring earlier stage opportunities and innovative technology. We believe that this strategic expansion will better position our company to build out a broader more diversified portfolio of drug candidates that we believe will add greater value to our company over the near and long-term. However, there can be no assurance that whatever product candidates or technology platforms we acquire, if any, will be successfully developed.
To spearhead this investment, we recently hired Dr. Preethi Sundaram as our Chief Product Development Officer. In that position, Dr. Sundaram will lead the strategy and direct the development of programs from early-stage R&D assets through late-stage clinical programs that will be focusing on developing therapies to treat rare diseases. We are also currently exploring several potential opportunities to acquire companies with drug products in development or to
in-license
drug products in development. However, no definitive agreements have been entered into to date.
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. 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.
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. Recently, in light of decreasing
COVID-19
case numbers and increasing vaccination, we have begun to relax these restrictions, including a return to
in-person
work. However, the continually changing nature of the pandemic means that these restrictions may return.
 
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We believe that because many healthcare providers have delayed seeing new patients because of the pandemic, there has been a delay in 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, we believe that as more healthcare providers resume seeing new patients on a regular basis, the impact of this aspect of the
COVID-19
pandemic on our business will lessen.
Firdapse
®
On November 28, 2018, we received approval from the FDA for Firdapse
®
Tablets, 10 mg for the treatment of adult LEMS patients (ages 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). 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 other neurological diseases, 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 an experienced inside sales agency generating leads through telemarketing to targeted physicians. We made these changes to expand our sales efforts beyond the neuromuscular specialists who regularly treat LEMS patients to reach the roughly 9,000 neurology and neuromuscular healthcare providers that may be treating an adult LEMS patient who can benefit from Firdapse
®
. We also continue to make available at
no-cost
a LEMS voltage gated calcium channel (VGCC) antibody testing program for use by physicians who suspect that one of their patients may have LEMS and wish to reach a definitive diagnosis. Further, we are continuing to expand our digital and social media activities in order to introduce our product and services to potential patients and their healthcare providers.
We are supporting the distribution of Firdapse
®
through Catalyst Pathways
®
, our personalized treatment support program. Catalyst Pathways
®
is a single source for personalized treatment support, education and guidance through the challenging dosing and titration regimen to an effective therapeutic dose. It also includes distributing the drug through a very small group of exclusive specialty pharmacies (primarily AnovoRx), which is consistent with the way that most pharmaceutical products for ultra-orphan diseases are distributed and dispensed to patients. We believe that by using specialty pharmacies in this way, the difficult task of navigating the health care system is far better for the patient needing treatment for their rare disease and the health care community in general.
In order to help adult LEMS patients afford their medication, we, like other pharmaceutical companies which are marketing drugs for ultra-orphan conditions, have developed an array of financial assistance programs that are available to reduce patient
co-pays
and deductibles to a nominal affordable amount. For eligible patients with commercial coverage, a
co-pay
assistance program designed to keep
out-of-pocket
costs to not more than $10.00 per month (currently $0.00 per month) 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 their medication 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). 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 Pharmaceuticals (“Jacobus”) is not permitted to market its amifampridine product, Ruzurgi
®
, 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. If Jacobus is able to successfully continue to 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, and Jacobus intervened in our case. Our complaint, which was filed in the federal district court for the Southern District of Florida, alleged 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 sought an order setting aside the FDA’s approval of Ruzurgi
®
.
 
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On July 30, 2020, the Magistrate Judge considering our 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 judgment and deny our motion for summary judgment. On September 29, 2020, the District Judge adopted the Report and Recommendation of the Magistrate Judge, granted the FDA’s and Jacobus’ motions for summary judgment, and dismissed our case.
We believe that the District Judge’s decision was incorrect as a matter of law and contrary to the plain language of the Orphan Drug Act. We believe that if the District Judge’s decision to grant summary judgment 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 to spend the millions of dollars necessary to develop an orphan drug. As a result, we have appealed the District Court’s decision to the Eleventh Circuit Court of Appeals. The case has been fully briefed and oral argument was held in March 2021. However, no decision has been received to date, and there can be no assurance as to the result of such proceeding.
We are currently developing a long-acting formulation of amifampridine phosphate. A number of candidate formulations have been prepared, and three of the most promising formulations were evaluated in a pharmacokinetic (PK) study completed during the fourth quarter of 2020. The results of this first PK study will be used to inform the design and refinement of future product formulations and additional PK work to be conducted. We have also completed a number of advisory board meetings with both patients and doctors in order to establish the optimum target characteristics of the long-acting formulation of amifampridine phosphate that are desired by the LEMS patient community and treating physicians. There can be no assurance that we will be able to successfully develop a long-acting formulation of amifampridine phosphate, that any such formulation will be approved by the FDA for marketing, or that any such formulation will be commercially viable.
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.
Unfortunately, the
MSK-002
trial did not achieve statistical significance on its primary endpoint or its secondary endpoint. However, we have recently concluded a detailed analysis of the data from this trial in an effort to understand why the
MuSK-MG
Phase 3 trial did not meet statistical significance on its endpoints, even though clinical improvement was observed by patients and investigators during the initial dose-titration period of the trial and in our previous
proof-of-concept
trial. We found in our analysis that there was a large degree of symptom variability during the double-blind withdrawal period. We believe that sources of such variability can be addressed in a redesigned study that may better demonstrate the efficacy of our drug for the treatment of
MuSK-MG.
We recently presented our hypotheses and a revised protocol to the FDA with respect to the
MuSK-MG
indication. The FDA provided written comments that were unfavorable towards a revised study design and further questioned the ability of the initial
MuSK-MG
pilot study to be supportive. These remarks make it unlikely that a single study similar design to
MSK-002
would be sufficient for potential approval of the
MuSK-MG
indication. We are preparing an appropriate expert panel to discuss options and review the likelihood of success for a
MuSK-MG
indication for Firdapse
®
.
We intend to conduct a
proof-of-concept
study evaluating Firdapse
®
as a treatment for Hereditary Neuropathy with Liability to Pressure Palsies (HNPP). The scientific basis for considering this indication is that leakage of neuron potassium channels is observed in HNPP. Since Firdapse
®
is a potassium channel blocker, it may mitigate the pathological effects of the potassium channel leakage in HNPP patients. The FDA requested that a new, patient centric endpoint be researched and used for our proposed study, without assurance that it would be acceptable for approval. Based upon the uncertainty of such an endpoint, we have decided not to conduct this as a company sponsored study. The proposed investigator is considering whether to seek Company support to conduct the study as an investigator-initiated study.
There can be no assurance that clinical trials of Firdapse
®
that we undertake in the future will be successful. Further, there can be no assurance that we will ever be granted the right to commercialize Firdapse
®
for any additional indications.
Our NDS filing for Firdapse
®
for the symptomatic treatment of LEMS was approved by Health Canada on July 31, 2020. In August 2020, we entered into a license agreement with KYE Pharmaceuticals (KYE), pursuant to which we licensed the Canadian rights for Firdapse
®
for the treatment of LEMS to KYE. Pursuant to the license agreement, KYE is obligated to pay us an
up-front
payment based on approval and product supply, data protection milestones based on achievements of sales and regulatory milestones, and a sharing of defined net sales upon commercialization.
On August 10, 2020, Health Canada issued a Notice of Compliance (NOC) to Medunik for Ruzurgi
®
for the treatment of LEMS. We initiated a legal proceeding in Canada seeking judicial review of Health Canada’s decision to issue the NOC for Ruzurgi
®
as incorrect and unreasonable under Canadian law. Data protection, per Health Canada regulations, is supposed to prevent Health Canada from issuing a NOC to a drug that directly or indirectly references an innovative drug’s data, for eight years from the date of the innovative drug’s approval. The Ruzurgi
®
Product Monograph clearly references pivotal nonclinical carcinogenicity and reproductive toxicity data for amifampridine phosphate developed by us. As such, we believe that our data was relied upon to establish the nonclinical safety profile of Ruzurgi
®
needed to meet the standards of the Canadian Food and Drugs Act.
 
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On June 3, 2021, we announced a positive decision in this proceeding that quashed the NOC previously issued for Ruzurgi
®
and remanded the matter to the Minister of Health to redetermine its decision to grant marketing authorization to Ruzurgi
®
in spite of Firdapse
®
’s data protection rights. However, on June 28, 2021, we announced that Health Canada had
re-issued
an NOC for Ruzurgi
®
, once again allowing the product to be marketed in Canada for patients with LEMS. As a result, in early July 2021, we, along with our partner KYE, filed a second suit against Health Canada to overturn their most recent decision. There can be no assurance as to the outcome of this proceeding.
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 have reached an agreement with Japanese regulatory authorities 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 recently been granted 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.
On June 28, 2021, we entered into a license agreement with DyDo Pharma, Inc. (DyDo), pursuant to which we
sub-licensed
to DyDo the Japanese rights for Firdapse
®
for the treatment of LEMS. Under the terms of the Agreement, DyDo will have joint rights to develop Firdapse
®
, and exclusive rights to commercialize the product, in Japan. DyDo will be responsible for funding all clinical, regulatory, marketing and commercialization activities in Japan. We will be responsible for clinical and commercial supply, as well as providing support to DyDo in its efforts to obtain regulatory approval for the product from the Japanese regulatory authorities. Subject to the satisfaction of terms and conditions as set forth in the Agreement, we have earned an upfront payment and are eligible to receive further development and sales milestones for Firdapse
®
, as well as revenue on product supplied to DyDo.
All of our patent rights for Firdapse
®
are derived from our license agreement. In August 2020, the United States Patent and Trademark Office (USPTO) allowed Patent No. 10,798,893 (the ’893 patent) to our licensor and thereby to us, and the patent issued on October 6, 2020. The patent is directed to the use of suitable doses of amifampridine to treat patients, regardless of the therapeutic indication, that are slow metabolizers of amifampridine. Any drug product containing amifampridine with a label that states the patented dosing regimens and doses in the Dosing and Administration section prior to April 7, 2034, the expiration date of the patent, could possibly infringe this patent. Generic drug product labels would necessarily have to do this, and we intend to take all appropriate actions to protect our intellectual property.
In that regard, in October 2020, we filed a lawsuit in the U.S. District Court for New Jersey against Jacobus and a lawsuit in the U.S. District Court for the Western District of Pennsylvania against the specialty pharmacy marketing Ruzurgi
®
, PantherRx Rare LLC (PantherRx), for infringement of the ‘893 patent. The suits have since been combined in the U.S. District Court for New Jersey. The lawsuit arises from Jacobus’ and PantherRx’s sales and marketing of Ruzurgi
®
(amifampridine) Tablets, 10 mg. The lawsuit alleges that the Ruzurgi
®
product infringes the ‘893 patent when administered in accordance with its product labeling. The lawsuit seeks damages and injunctive relief to prevent further marketing of Ruzurgi
®
in violation of our patent rights. The lawsuit is in the discovery stage and there can be no assurance as to the results of these proceedings.
In April 2021, t
he USPTO allowed Patent No. 11,060,128 (the ’128 patent) to our licensor and thereby to us, and the patent issued on July 13, 2021. The patent is directed to the use of suitable doses of amifampridine to treat patients suffering with LEMS, that are slow metabolizers of amifampridine. Any drug product containing amifampridine with a label for the treatment of LEMS, that states the patented dosing regimens and doses in the Dosing and Administration section of a product label could possibly infringe this patent.
We are also pursuing additional patent applications for Firdapse
®
in an effort to further protect our drug product. There can be no assurance that any additional patents will be issued which provide additional intellectual property protection for our drug product.
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.
 
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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, 2021, we had cash and investments of approximately $155.3 million and no funded debt. 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.
During the fiscal quarter ended June 30, 2021, we continued to generate revenues from product sales of Firdapse
®
in the U.S. We expect these revenues to fluctuate in future periods based on our sales of Firdapse
®
. We received approval from Health Canada on July 31, 2020, for Firdapse
®
for the symptomatic treatment of LEMS in adults and as of December 31, 2020, we had launched Firdapse
®
in Canada. For the three and six months ended June 30, 2021 and 2020, revenues generated under our collaborative agreement with KYE Pharmaceuticals were immaterial. We expect our revenues from the KYE collaborative agreement to fluctuate in future periods based on our collaborator’s ability to sell Firdapse
®
in Canada.
For the three and six months ended June 30, 2021, we did not generate revenues under our collaborative agreement with Endo. We expect our revenues from the Endo collaborative agreement to fluctuate in future periods based on our collaborator’s ability to meet various regulatory milestones set forth in such agreement.
For the three and six months ended June 30, 2021, we earned approximately $2.7 million in revenue under our licensing agreement with DyDo. We expect our revenues from the DyDo license agreement to fluctuate in future periods based on DyDo’s ability to meet various regulatory milestones set forth in such agreement.
Cost of Sales.
Cost of sales consists of third-party manufacturing costs, freight, royalties, and indirect overhead costs associated with sales of Firdapse
®
. Cost of sales may also include period costs related to certain inventory manufacturing services, inventory adjustments charges, unabsorbed manufacturing and overhead costs, and manufacturing variances.
 
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Research and Development Expenses.
Our research and development expenses consist of costs incurred for company-sponsored research and development activities, as well as support for selected investigator-sponsored research. The major components of research and development costs include preclinical study costs, clinical manufacturing costs, clinical study and trial expenses, insurance coverage for clinical trials, consulting, and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead costs related to our product development efforts. To date, all of our research and development resources have been devoted to the development of Firdapse
®
,
CPP-109
(our version of vigabatrin), and formerly
CPP-115,
and we currently expect that our future development costs will be attributable principally to the continued development of Firdapse
®
. However, as noted in the Overview above, we are prepared to invest in future research and development, including earlier stage opportunities and innovative technology.
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 substantial 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 including litigation cost, 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 before income taxes.
Recently Issued Accounting Standards.
For discussion of recently issued accounting standards, please see Note 2, “Basis of Presentation and Significant Accounting Policies,” in the interim consolidated financial statements included in this report.
 
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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 2020 Annual Report on Form
10-K
that we filed with the SEC on March 15, 2021. Our most critical accounting policies and estimates include: accounting for revenue recognition, leases, preclinical study and clinical trial expenses, stock-based compensation and valuation allowance for deferred tax assets. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, our expected course of development, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
included in our 2020 Annual Report on
Form 10-K.
Results of Operations
Revenues.
For the three and six months ended June 30, 2021, we recognized approximately $33.6 million and $63.8 million, respectively, in net revenue from product sales from Firdapse
®
compared to approximately $29.6 million and $58.7 million for the three and six months ended June 30, 2020. We recognized approximately $2.7 million for the three and six months ended June 30, 2021 in license and other revenue. We had no revenues from our collaborative or license arrangements for the three and six months ended June 30, 2020.
Cost of Sales.
Cost of sales was approximately $4.5 million and $9.2 million for the three and six months ended June 30, 2021 compared to approximately $4.1 million and $8.3 million for the three and six months ended June 30, 2020. Cost of sales consists principally of royalty payments which are based on net revenue as defined in the applicable license agreement.
Research and Development Expenses.
Research and development expenses for the three months ended June 30, 2021 and 2020 were approximately $4.5 million and $4.4 million, respectively, and represented approximately 21.7% and 22.5% of total operating costs and expenses for the three months ended June 30, 2021 and 2020, respectively. Research and development expenses for the three months ended June 30, 2021 and 2020 were as follows (in thousands):
 
    
Three months ended
June 30,
    
Change
 
    
2021
    
2020
    
$
    
%
 
Research and development expenses
   $ 4,074      $ 3,929        145        3.7
Employee stock-based compensation
     376        421        (45      (10.7 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total research and development expenses
   $ 4,450      $ 4,350        100        2.3
  
 
 
    
 
 
    
 
 
    
 
 
 
Research and development expenses for the six months ended June 30, 2021 and 2020 were approximately $7.5 million and $8.6 million, respectively, and represented approximately 18.2% and 22.7% of total operating costs and expenses for the six months ended June 30, 2021 and 2020, respectively. Research and development expenses for the six months ended June 30, 2021 and 2020 were as follows (in thousands):
 
    
Six months ended
June 30,
    
Change
 
    
2021
    
2020
    
$
    
%
 
Research and development expenses
   $ 6,692      $ 7,734        (1,042      (13.5 )% 
Employee stock-based compensation
     765        839        (74      (8.8 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total research and development expenses
   $ 7,457      $ 8,573        (1,116      (13.0 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
Research and development expenses stayed relatively consistent for the three and six month periods ended June 30, 2021 when compared to the same periods in 2020. For the three and six months ended June 30, 2020, research and development expenses included costs relating to our
MuSK-MG
clinical trial and our SMA type 3
proof-of-concept
trial, both of which were completed in the second half of 2020. For the three and six months ended June 30, 2021, research and development expenses included costs relating to winding down of the sites for both the MuSK-MG clinical trial and SMA type 3 proof-of-concept trial. Research and development costs in both 2020 and 2021 periods included expenses relating to medical and regulatory affairs, our expanded access programs, and our efforts to develop a long-acting formulation of amifampridine phosphate.
 
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We expect that research and development expenses will continue to be substantial in 2021 and beyond as we continue our Expanded Access Program, take steps to continue the development of a long-acting formulation of amifampridine phosphate and evaluate Firdapse
®
as a treatment for other neuromuscular diseases. Research and development expenses will also increase if we elect to further the development of Firdapse
®
for
MuSK-MG
or if we successfully execute on our strategic initiative to acquire or
in-license
innovative technology platforms and/or earlier stage programs in other therapeutic categories outside of neuromuscular diseases.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses for the three months ended June 30, 2021 and 2020 were approximately $11.5 million and $10.8 million, respectively, and represented 56.2% and 56.1% of total operating costs and expenses for the three months ended June 30, 2021 and 2020, respectively. Selling, general and administrative expenses for the three months ended June 30, 2021 and 2020 were as follows (in thousands):
 
    
Three months ended
June 30,
    
Change
 
    
2021
    
2020
    
$
    
%
 
Selling
   $ 5,981      $ 5,622        359        6.4
General and administrative
     4,409        3,838        571        14.9
Employee stock-based compensation
     1,142        1,373        (231      (16.8 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total selling, general and administrative expenses
   $ 11,532      $ 10,833        699        6.5
  
 
 
    
 
 
    
 
 
    
 
 
 
Selling, general and administrative expenses for the six months ended June 30, 2021 and 2020 were approximately $24.2 million and $20.9 million, respectively, and represented 59.2% and 55.3% of total operating costs and expenses for the six months ended June 30, 2021 and 2020, respectively. Selling, general and administrative expenses for the six months ended June 30, 2021 and 2020 were as follows (in thousands):
 
    
Six months ended
June 30,
    
Change
 
    
2021
    
2020
    
$
    
%
 
Selling
   $ 11,657      $ 11,425        232        2.0
General and administrative
     10,267        6,996        3,271        46.8
Employee stock-based compensation
     2,324        2,475        (151      (6.1 )%