CATALYST PHARMACEUTICALS, INC. - Quarter Report: 2017 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

For the Quarterly Period Ended June 30, 2017

OR

Commission File No. 001-33057

CATALYST PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

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

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 (Check one):

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 84,554,979 shares of common stock, $0.001 par value per share, were outstanding as of August 4, 2017.

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CATALYST PHARMACEUTICALS, INC.

INDEX

PART I. FINANCIAL INFORMATION

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CATALYST PHARMACEUTICALS, INC.

BALANCE SHEETS

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

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CATALYST PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS (unaudited)

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

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CATALYST PHARMACEUTICALS, INC.

STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)

For the six months ended June 30, 2017

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

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CATALYST PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS (unaudited)

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

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CATALYST PHARMACEUTICALS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

Catalyst Pharmaceuticals, Inc. (the Company) is a development-stage biopharmaceutical company focused on developing and commercializing innovating therapies for people with rare debilitating diseases, including Lambert-Eaton Myasthenic Syndrome (LEMS), Congenital Myasthenic Syndromes (CMS) and infantile spasms.

Since inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. The Company’s primary focus is on the development and commercialization of its drug candidates. The Company has incurred operating losses in each period from inception through June 30, 2017. The Company has been able to fund its cash needs to date through several public and private offerings of its common stock and warrants, through government grants, and through an investment by a strategic purchaser. See Note 9.

Capital Resources

While there can be no assurance, based on currently available information, the Company estimates that it has sufficient resources to support its operations for at least the next 12 months.

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

In the opinion of management, the accompanying unaudited interim financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of the dates and for the periods presented. Accordingly, these statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2016 included in the 2016 Annual Report on Form 10-K filed by the Company with the SEC. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any future period or for the full 2017 fiscal year.

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

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As of June 30, 2017, there were outstanding stock options to purchase 6,090,000 shares of common stock, of which stock options to purchase 3,244,996 shares of common stock were exercisable as of June 30, 2017.

For the three and six-month periods ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense as follows:

Potentially dilutive options to purchase common stock as of both June 30, 2017 and 2016 have exercise prices ranging from $0.47 to $4.64. Potentially dilutive warrants to purchase common stock as of June 30, 2016 have exercise prices ranging from $1.04 to $2.08. Potentially dilutive warrants to purchase common stock as of June 30, 2017 have an exercise price of $2.08 and expire in August 2017.

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On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public companies, the changes are effective for reporting periods (annual and interim) beginning after December 15, 2016. The Company adopted this standard in the first quarter of 2017. The adoption of this standard did not have a material impact on the Company’s financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required if the fair value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 is effective for all entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within each annual reporting period, applied prospectively on or after the effective date. The Company is currently evaluating the impact this accounting standard will have on its financial statements, however, does not expect the adoption of this standard to have a material impact on the Company’s financial statements.

2011 Warrants

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

The closing price of the Company’s common stock would fall under Level 1 of the fair value hierarchy as it is a quoted price in an active market. The risk-free rate of return is a Level 2 input, while the historical volatility is a Level 3 input in accordance with the fair value accounting guidance. Since the lowest level input is a Level 3, the Company determined the 2011 warrants liability is most appropriately classified within Level 3 of the fair value hierarchy. This liability is subject to a fair value mark-to-market adjustment each reporting period.

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

The following table rolls forward the fair value of the Company’s warrants liability activity for the three and six-month periods ended June 30, 2017 and 2016:

During both the three and six months ended June 30, 2017, 613,913 of the 2011 warrants were exercised, with proceeds of $798,087 to the Company. During the three and six months ended June 30, 2016, none of the 2011 warrants were exercised. On May 2, 2017, the 150,000 remaining outstanding and unexercised 2011 warrants expired.

Prepaid expenses and other current assets consist of the following:

Property and equipment, net consists of the following:

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Depreciation expense was $12,957 and $25,915, respectively, for the three and six-month periods ended June 30, 2017 and $8,762 and $21,960 for the three and six-month periods ended June 30, 2016, respectively.

Accrued expenses and other liabilities consist of the following:

Under the license agreement with Northwestern, the Company is responsible for continued research and development of any resulting product candidates. As of June 30, 2017, the Company has paid $411,590 in connection with the license and has accrued license fees of $205,000 in the accompanying June 30, 2017 balance sheet for expenses, maintenance fees and milestones. In addition, the Company is obligated to pay certain milestone payments in future years relating to clinical development activities with respect to CPP-115, and royalties on any products resulting from the license agreement, if the Company does not cancel the license agreement. The next milestone payment of $300,000 is due on the earlier of successful completion of the first Phase 3 clinical trial for CPP-115 or August 27, 2018.

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As part of the License Agreement, the Company has agreed to pay: (i) royalties to BioMarin 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.

Additionally, the Company has agreed to pay certain milestone payments that BioMarin is obligated to pay to both the third-party licensor and to the former stockholders of Huxley Pharmaceuticals (“Huxley”) under an earlier stock purchase agreement between BioMarin and the former Huxley stockholders. These milestones aggregate (i) up to approximately $2.6 million due upon acceptance by the U.S. Food & Drug Administration (FDA) of a filing of a new drug application (NDA) for Firdapse^® for the treatment of LEMS or CMS, and (ii) up to approximately $7.2 million due on the unconditional approval by the FDA of an NDA for Firdapse^® for the treatment of LEMS; provided, however that the total milestone payments that the Company will be obligated to pay if it meets milestone (i) and/or milestone (ii) above will be reduced to an aggregate of $150,000 and $3.0 million, respectively, if either of these respective milestones are satisfied after April 20, 2018 (the date on which BioMarin’s obligations to pay milestone payments to the former stockholders of Huxley expire).

The Company also agreed to share in the cost of certain post-marketing studies being conducted by BioMarin, and, as of June 30, 2017, the Company had paid BioMarin $3.8 million related to expenses in connection with Firdapse^® studies and trials.

The Company is subject to income taxes in the U.S. federal jurisdiction and various states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for any years before 2013. 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.

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2014 Shelf Registration Statement

On January 31, 2014, the Company filed a shelf Registration Statement on Form S-3 (the 2014 Shelf Registration Statement) with the SEC to sell up to $100 million of common stock. This registration statement (file No. 333-193699) was declared effective by the SEC on March 19, 2014 and expired on March 19, 2017. The Company conducted the following sales under the 2014 Shelf Registration Statement:

2016 Shelf Registration Statement

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

2017 Shelf Registration Statement

Subsequent to quarter-end, on July 12, 2017, the Company filed a universal shelf Registration Statement on Form S-3 (the 2017 Shelf Registration Statement) with the SEC to sell up to $150 million of common stock, preferred stock, warrants to purchase common stock, or debt securities (including debt securities that may be convertible or exchangeable for common stock or other securities), which securities may be offered separately or together in units or multiple series. The 2017 Shelf Registration Statement (file No. 333-219259) was declared effective by the SEC on July 26, 2017. No sales have been conducted to date under the 2017 Shelf Registration Statement. See Note 11.

Warrant Exercises

During both the three and six months ended June 30, 2017, the Company issued an aggregate of 1,582,663 shares of its authorized but unissued common stock upon the exercise of previously issued common stock purchase warrants, with net proceeds to the Company of $1,805,437. No warrants were exercised during the three and six months ended June 30, 2016.

Stock Options

During the three and six-month periods ended June 30, 2017, the Company granted seven-year options to purchase an aggregate of 15,000 and 1,535,000 shares, respectively, of the Company’s common stock to employees and directors. The Company recorded stock-based compensation related to stock options totaling $619,754 and $1,355,290 respectively, during the three and six-month periods ended June 30, 2017. During the three and six-month periods ended June 30, 2017, respectively, 621,667 and 876,667 options vested.

During the three and six-month periods ended June 30, 2016, the Company granted seven-year options to purchase an aggregate of 1,090,000 and 1,245,000 shares, respectively, of the Company’s common stock to employees and directors. The Company recorded stock-based compensation related to stock options totaling $338,506 and $777,712 respectively, during the three and six-month periods ended June 30, 2016. During the three and six-month periods ended June 30, 2016, respectively, 175,000 and 231,665 options vested.

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No options were exercised during the three and six months ended June 30, 2017.

No options were exercised during the three months ended June 30, 2016. During the six months ended June 30, 2016, options to purchase 50,000 shares of the Company’s common stock were exercised on a “cashless” basis, resulting in the issuance of an aggregate 20,030 shares of the Company’s common stock.

As of June 30, 2017, there was approximately $2,292,000 of unrecognized compensation expense related to non-vested stock option awards granted under the 2006 and 2014 Stock Incentive Plans. The cost is expected to be recognized over a weighted average period of approximately 1.58 years.

Restricted Stock Units

No restricted stock units were granted during the three and six months ended June 30, 2017 and 2016. The Company recorded stock-based compensation related to restricted stock units totaling $18,815 and $37,423, respectively, during the three and six-month periods ended June 30, 2017. The Company recorded stock-based compensation related to restricted stock units totaling $18,763 and $37,526, respectively, during the three and six-month periods ended June 30, 2016. As of June 30, 2017, there was approximately $28,000 of total restricted stock unit compensation expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted average period of 0.37 years.

Subsequent to quarter-end, on July 12, 2017, the Company filed a universal shelf Registration Statement on Form S-3 (the 2017 Shelf Registration Statement) with the SEC to sell up to $150 million of common stock, preferred stock, warrants to purchase common stock, or debt securities (including debt securities that may be convertible or exchangeable for common stock or other securities), which securities may be offered separately or together in units or multiple series. The 2017 Shelf Registration Statement (file No. 333-219259) was declared effective by the SEC on July 26, 2017. No sales have been conducted to date under the 2017 Shelf Registration Statement. See Note 9.

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

Introduction

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

Overview

We are a biopharmaceutical company focused on developing and commercializing innovative therapies for people with rare debilitating diseases. We currently have three drug candidates in development:

In October 2012, we licensed the North American rights to Firdapse^®, a proprietary form of amifampridine phosphate, or chemically known as 3,4-diaminopyridine phosphate, from BioMarin Pharmaceutical Inc. (BioMarin). In August 2013, we were granted “breakthrough therapy designation” by the U.S. Food & Drug Administration (FDA) for Firdapse^® for the treatment of patients with Lambert-Eaton Myasthenic Syndrome, or LEMS, a rare and sometimes fatal autoimmune disease characterized by muscle weakness. Further, the FDA granted Orphan Drug Designation for Firdapse^® for the treatment of patients with LEMS, Congenital Myasthenic Syndromes, or CMS and Myasthenia Gravis (MG).

The chemical entity, amifampridine (3,4-diaminopyridine, or 3,4-DAP), has never been approved by the FDA for any indication. Because amifampridine phosphate (Firdapse^®) has been granted Orphan Drug designation for the treatment of LEMS, CMS and MG by the FDA, the product is also eligible to receive seven years of marketing exclusivity for either or all of these indications. Further, if we are the first pharmaceutical company to obtain approval for an amifampridine product, of which there can be no assurance, we will be eligible to receive five years of marketing exclusivity with respect to the use of this product for any indication, running concurrently with the seven years of orphan marketing exclusivity described above (if both exclusivities are granted).

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We previously sponsored a multi-center, randomized, placebo-controlled Phase 3 trial evaluating Firdapse^® for the treatment of LEMS. This Phase 3 trial, which involved 38 subjects, was designed as a randomized “withdrawal” trial in which all patients were treated with Firdapse^® during a 7 to 91-day run-in-period followed by treatment with either Firdapse^® or placebo over a two-week randomization period. The co-primary endpoints for this Phase 3 trial were the comparison of changes in patients randomized to continue Firdapse^® versus those who transitioned to placebo that occurred in both the Quantitative Myasthenia Gravis Score (QMG), which measures muscle strength, and subject global impression score (SGI), on which the subjects rate their global impression of the effects of a study treatment during the two-week randomization period. In September 2014, we reported positive top-line results from this Phase 3 trial.

During 2014, we established an expanded access program (EAP) to make Firdapse^® available to any patients diagnosed with LEMS, CMS, or Downbeat Nystagmus in the United States, who meet the inclusion and exclusion criteria, with Firdapse^® being provided to patients for free until sometime after new drug application (NDA) approval, should we receive such approval (of which there can be no assurance). We continue to inform neuromuscular physicians on the availability of the Firdapse^® EAP and also to work with various rare disease advocacy organizations to inform patients and other physicians about the program.

On December 17, 2015, we announced completion of the submission of an NDA for Firdapse^® for the treatment of LEMS and CMS. However, on February 17, 2016, we announced that we had received a “refusal to file” (RTF) letter from the FDA regarding our NDA submission. In early April 2016, we met with the FDA to obtain greater clarity regarding what will be required by the FDA to accept the Firdapse^® NDA for filing. Following the receipt of the formal minutes of that meeting, on April 26, 2016, we issued a press release reporting that the FDA has advised us that in addition to the results of our previously submitted multi-center, randomized, placebo-controlled Phase 3 trial, we will need to submit positive results from a second adequate and well-controlled study in patients with LEMS. Additionally, there is a requirement for several more short-term toxicology studies, which are currently in process.

In October 2016, we announced that we had reached an agreement with the FDA under a Special Protocol Assessment (SPA) for the protocol design, clinical endpoints, and statistical analysis approach to be taken in our second Phase 3 study evaluating Firdapse^® (amifampridine phosphate) for the symptomatic treatment of LEMS. A SPA is a process by which sponsors ask the FDA to evaluate the protocol of a proposed clinical trial to determine whether it adequately addresses scientific and regulatory requirements for the purpose identified by the sponsor. A SPA agreement indicates FDA concurrence with the adequacy and acceptability of specific critical elements of protocol design, endpoints and analysis. Additionally, it provides a binding agreement with FDA’s review division that a pivotal trial design, conduct, and planned analysis adequately addresses the scientific and regulatory objectives in support of a regulatory submission for drug approval. However, the FDA may rescind a SPA agreement when the division director determines that a substantial scientific issue essential to determining the safety or efficacy of the product has been identified after the trial has begun.

We are conducting our second Phase 3 trial evaluating Firdapse^® for the treatment of LEMS (designated as LMS-003) at sites in Miami, Florida and Los Angeles, California. This double-blind, placebo-controlled withdrawal trial will include approximately 28 subjects, and will have the same co-primary endpoints as our first Phase 3 trial evaluating Firdapse^® for the treatment of LEMS. Further, the FDA is allowing us to enroll patients from our expanded access program as study subjects in this second trial. Details of the Phase 3 clinical trial are available on www.clinicaltrials.gov (NCT02970162).

We initiated this trial in December 2016, and we expect to report top-line results from this trial during the second half of 2017. Assuming the results of this trial are successful, and our anticipated timeline for the completion of this trial is met, we expect to resubmit an NDA for Firdapse^® for the treatment of LEMS before the end of 2017. There can be no assurance as to the timing or requirements of this trial, whether this trial, along with the results of our first Phase 3 trial, will be sufficient for the FDA to accept for filing any NDA that we might resubmit in the future for Firdapse^®, or whether Firdapse^® will ever be approved for commercialization.

Our original NDA submission for Firdapse^® included data and information (including data from a currently ongoing investigator treatment IND) providing evidence supporting the benefits of Firdapse^® for treating certain types of CMS, and requested that CMS be included in our initial label for Firdapse^®. To provide additional support for our submission of an NDA for Firdapse^® for the treatment of CMS, in October 2015 we

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initiated a small blinded clinical trial at four academic centers of up to 10 subjects in the pediatric CMS population, ages 2 to 17. However, after considering comments from the FDA, we determined to enroll both adult and pediatric subjects with CMS in this trial and to expand the number of subjects to be evaluated in the trial to an aggregate of approximately 20 subjects. We are currently conducting this study at five sites around the United States, and we are currently adding several additional sites outside the United States. Details of this trial are available on www.clinicaltrials.gov (NCT02562066).

Based on currently available information, we expect to report top line results from this study in the first half of 2018 and if the results of the study are successful, we hope to add the CMS indication to our labeling for Firdapse^®. We also may include in our initial filing for LEMS those limited types of CMS that are generally considered mechanistically similar to LEMS. There can be no assurance that any trial we perform for Firdapse^® for the treatment of CMS will be successful or whether any NDA that we may submit for Firdapse^® for the treatment of CMS will be filed by the FDA for review and approved.

In February 2016, we announced the initiation of an investigator-sponsored, randomized, double-blind, placebo-controlled, crossover Phase 2/3 clinical trial evaluating the safety, tolerability and potential efficacy of Firdapse^® as a symptomatic treatment for patients with MuSK-MG. MuSK- MG, an ultra-rare sub-population of MG patients, is a debilitating neuromuscular disease, and there are currently no FDA approved therapies for this specific form of MG. Seven patients participated in this proof-of-concept trial. We provided study drug, placebo and financial support for this study.

On March 15, 2017, we reported top-line results from this trial. Both of the co-primary efficacy endpoints of change from baseline (CFB) in total Quantitative Myasthenia Gravis (QMG) score (p=0.0003) and CFB in total Myasthenia Gravis Activities of Daily Living (MG-ADL) score (p=0.0006) were statistically and clinically significant in this trial. Several secondary efficacy measures also achieved statistical significance. Amifampridine phosphate was well tolerated in this population of patients.

We are currently discussing with the FDA a registration trial evaluating Firdapse^® for the treatment of patients with MuSK-MG. There can be no assurance that future clinical trials that we initiate to evaluate Firdapse^® for this indication will be successful, or whether we can obtain the resources available to fund any such registration trial. Further, there can also be no assurance that the FDA will ever approve Firdapse^® for this indication.

Finally, we may seek to evaluate Firdapse^® for the treatment of other treatment-refractory types of MG or other rare, similar neuromuscular diseases, although we have not yet begun to develop clinical programs for these indications and all such programs are subject to the availability of funding. There can be no assurance that Firdapse^® will be an effective treatment for other treatment-refractory types of MG or for any other rare, similar neuromuscular diseases.

Prior to the receipt of the RTF letter, we had been actively taking steps to prepare for the commercialization of Firdapse^® in the United States. In light of the determination that we will have to complete a second adequate and well controlled study evaluating Firdapse^® for the treatment of LEMS, in the first quarter of 2016 we placed most of these commercialization activities on hold in order to conserve cash. We currently expect to recommence our commercialization plans for Firdapse^® during the second half of 2017 as we move closer to submitting an NDA for Firdapse^®. Notwithstanding, we are continuing to work with several rare disease advocacy organizations to help increase awareness of LEMS and CMS and to provide awareness and outreach support for the physicians who treat these rare diseases and the patients they treat.

We are developing CPP-115, a GABA aminotransferase inhibitor that, based on our preclinical studies to date, we believe is a more potent form of vigabatrin, and may have fewer side effects (e.g., visual field defects) than those associated with vigabatrin. We are hoping to develop CPP-115 for the treatment of refractory infantile spasms and possibly for the treatment of adult refractory patients with Tourette’s Disorder. CPP-115 has been granted Orphan Drug Designation by the FDA for the treatment of infantile spasms and Orphan Medicinal Product Designation in the European Union, or E.U., for West syndrome (a form of infantile spasms).

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We are currently refining our development plans for this product. Once the refinement of our development plans is completed, and subject to the then availability of funding, we plan to take the steps to complete the work required to make our drug candidate Phase 2 ready. We are also working with one or more potential investigators who have expressed an interest in evaluating our product for particular indications (particularly infantile spasms).

We are also continuing our efforts to seek a partner to work with us in furthering the development of CPP-115. However, no agreements have been entered into to date.

There can be no assurance that we will ever successfully commercialize CPP-115.

During September 2015, we announced the initiation of a project to develop a generic version of Sabril^® (vigabatrin). Sabril^® is marketed by Lundbeck Inc. in the United States for the treatment of infantile spasms and complex partial seizures. There can be no assurance that we will be successful in these efforts or that any abbreviated new drug application (ANDA) that we submit for vigabatrin will be accepted for review or approved. Further, while there can be no assurance, we are hopeful that any ANDA submission we make for vigabatrin will be one of the first ANDAs submitted for this product.

We are continuing our efforts to seek a partner to work with us in furthering the development of generic Sabril^®. However, no agreements have been entered into to date.

There can be no assurance that we will ever successfully commercialize a generic version of Sabril^®.

Risks Associated with Product Development

The successful development of our current drug candidates or any other drug candidate we may acquire, develop or license in the future is highly uncertain. We cannot reasonably estimate or know the nature, timing, or estimated expenses of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence due to the numerous risks and uncertainties associated with developing such products, including the uncertainty of:

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Available Capital Resources

Based on forecasts of available cash, we currently believe that we have sufficient resources to fund our operations for at least the next 12 months. However, we will require additional funding to support our operations beyond that time. There can be no assurance that we will obtain the additional funding or that we will ever be in a position to commercialize any of our drug candidates. See “Liquidity and Capital Resources” below for further information on our liquidity and cash flow.

Basis of presentation

Revenues.

We are a development stage company and have had no revenues from product sales to date. We will not have revenues from product sales until such time as we receive approval of our drug candidates, successfully commercialize our products or enter into a licensing agreement which may include up-front licensing fees, of which there can be no assurance.

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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, scientific advisors 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 CPP-109 (our version of vigabatrin), CPP-115 and Firdapse^®, and we expect this to continue for the foreseeable future.

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 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 such begins, and incurring additional expenditures as the study or trial progresses and reaches certain milestones.

Selling and marketing expenses.

We do not currently have any selling or marketing expenses. We had been incurring costs tied to our future sales and marketing efforts for Firdapse^®. However, during the first quarter of 2016, following the receipt of the RTF letter, we put most of these activities on hold in order to conserve cash. We currently expect to recommence developing our commercialization plans for Firdapse^® during the second half of 2017. Pre-commercialization costs are included in general and administrative expenses.

General and administrative expenses.

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, pre-commercialization costs, and professional fees for legal, information technology, accounting and consulting services.

Stock-based compensation.

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

Warrants Liability.

We issued warrants to purchase shares of our common stock as part of an equity financing that we completed in October 2011. In accordance with U.S. GAAP, we have recorded the fair value of these warrants as a liability in the accompanying balance sheet at December 31, 2016 using a Black-Scholes option-pricing model. We have remeasured the fair value of this warrants liability at each reporting date until the warrants were exercised or until they expired on May 2, 2017. Changes in the fair value of the warrants liability are reported in the statements of operations as income or expense. The fair value of the warrants liability was subject to significant fluctuation based on changes in the inputs to the Black-Scholes option-pricing model, including our common stock price, expected volatility, expected term, the risk-free interest rate and dividend yield. The remaining unexercised 2011 liability warrants expired on May 2, 2017.

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Income taxes.

We have incurred operating losses since inception. Our net deferred tax asset has a 100% valuation allowance as of June 30, 2017 and December 31, 2016, as we believe it is more likely than not that the deferred tax asset will not be realized. If an ownership change, as defined under Internal Revenue Code Section 382, occurs, the use of any of our carry-forward tax losses may be subject to limitation.

As required by ASC 740, Income Taxes, we would recognize 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.

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 financial statements included in this report.

Non-GAAP Financial Measures.

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

The non-GAAP financial measure that we typically present excludes from the calculation of net loss the expense (or the income) associated with the change in fair value of the liability-classified warrants. Further, we often report non-GAAP net loss per share, which is calculated by dividing non-GAAP net loss by the weighted average common shares outstanding.

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies, please refer to Note 2 on the Financial Statements included in our 2016 Annual Report on Form 10-K filed with the SEC. Our most critical accounting policies and estimates include: accounting for research and development expenses and stock-based compensation, measurement of fair value, fair value of warrants liability, income taxes and reserves. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, our expected course of development, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2016 Annual Report on Form 10-K.

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Results of Operations

Revenues.

We had no revenues for the three and six-month periods ended June 30, 2017 and 2016.

Research and Development Expenses.

Research and development expenses for the three and six-month periods ended June 30, 2017 were $2,451,751 and $5,265,680, respectively, including stock-based compensation expense in each of the three and six-month periods of $223,552 and $429,904, respectively. Research and development expenses for the three and six-month periods ended June 30, 2016 were $2,508,897 and $6,055,288 respectively, including stock-based compensation expense in each of the three and six-month periods of $164,392 and $258,175, respectively. Research and development expenses, in the aggregate, represented approximately 59% and 59% of total operating costs and expenses for the three and six-month periods ended June 30, 2017 and 52% and 55% for the three and six-month periods ended June 30, 2016, respectively. The stock-based compensation is non-cash and relates to the expense of stock options awards to certain employees.

Expenses for research and development for the six months ended June 30, 2017, excluding stock-based compensation, decreased compared to amounts expended in the same period in 2016. Research and development expenses in the first half of 2016 primarily included, among other items, (i) regulatory affairs and legal costs associated with the receipt of the refusal-to-file letter in February 2016, (ii) costs relating to the close-out of our first Phase 3 trial evaluating Firdapse^® for the treatment of LEMS, and (iii) costs incurred to build up inventory to launch Firdapse^® in the summer of 2016 (which did not occur as anticipated). Research and development expenses in the first half of 2017 primarily included, among other items, costs associated with our ongoing second Phase 3 trial evaluating Firdapse^® for the treatment of LEMS and our ongoing clinical trial evaluating Firdapse^® for the treatment of CMS. We expect that research and development costs will continue to be substantial during the balance of 2017 and into 2018 as we complete our second Phase 3 trial evaluating Firdapse^® for the treatment of LEMS, continue our clinical trial evaluating Firdapse^® for the treatment of CMS, and prepare for the submission of an NDA for Firdapse^®.

Selling and Marketing Expenses.

We had no selling expenses for the six month periods ended June 30, 2017 and 2016. In 2016, we had been incurring costs tied to our future sales and marketing efforts for Firdapse^®. However, during the first quarter of 2016, following the receipt of the RTF letter, we put most of these activities on hold in order to conserve cash. We currently expect to recommence developing our commercialization plans for Firdapse^® during the second half of 2017. Pre-commercialization costs are included in general and administrative expenses.

General and Administrative Expenses.

General and administrative expenses for the three and six months ended June 30, 2017 were $1,729,520 and $3,595,462, respectively, including stock-based compensation expense in each of the three and six-month periods ending June 30, 2017 of $415,017 and $962,809, respectively. General and administrative expenses for the three and six months ended June 30, 2016 were $2,305,555 and $4,996,700, respectively, including stock-based compensation expense in each of the three and six-month periods ending June 30, 2016 of $192,877 and $557,063, respectively. General and administrative expenses represented 41% and 41% of total operating costs and expenses for the three and six months ended June 30, 2017 and 48% and 45% for the three and six months ended June 30, 2016, respectively. The decrease in general and administrative expenses for the six months ended June 30, 2017 when compared to the same period in 2016 is primarily due to decreased employee costs due to a reduction in headcount during May of 2016, and decreases in recruiting expenses and consulting costs for pre-commercialization expenses. We expect that general and administrative costs, excluding pre-commercialization costs, will remain consistent with the amount incurred in the first half of 2017 for the balance of 2017.

Stock-Based Compensation.

Total stock-based compensation for the three and six-month periods ended June 30, 2017 were $638,569 and $1,392,713 and for the three and six-month periods ended June 30, 2016 were $357,269 and $815,238, respectively. The increase in stock-based compensation for the six-month periods ended June 30, 2017 when compared to the same period in 2016, is primarily due to the expense of options granted to employees and directors during the first half of 2017.

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Change in fair value of warrants liability.

In connection with our October 2011 equity offering, we issued warrants to purchase an aggregate of 1,523,370 shares of common stock. The fair value of the portion of these warrants which remain outstanding is recorded in the liability section of the balance sheet and was estimated at $0 and $122,226 at June 30, 2017 and December 31, 2016, respectively. The fair value of the warrants liability is determined at the end of each reporting period with the resulting gains or losses recorded as the change in fair value of warrants liability in the statements of operations. For the three and six months ended June 30, 2017, we recognized a gain of $210,331 and a loss of $186,904, respectively, due to the change in the fair value of the warrants liability. For the three and six months ended June 30, 2016, we recognized gains of $152,783 and $886,139, respectively. The gain during the three months ended June 30, 2017 was principally a result of the decrease of our stock price between March 31, 2017 and the warrants liability expiration date on May 2, 2017. The loss during the six months ended June 30, 2017 was principally a result of the increase of our stock price between December 31, 2016 and the warrants liability expiration date on May 2, 2017. The gains during the three and six months ended June 30, 2016 were principally a result of the decrease of our stock price between March 31, 2016 and June 30, 2016 and between December 31, 2015 and June 30, 2016, respectively.

Other Income, Net.

We reported other income, net in all periods relating to our investment of funds received from offerings of our securities. The slight decrease in other income, net for the six months ended June 30, 2017 when compared to the same period in 2016 is due to lower average investment balances from funding working capital. Other income, net, consists of interest income, dividend income and unrealized and realized gain (loss) on trading securities. These proceeds are used to fund our drug development activities and our operations. Substantially all such funds were invested in short-term interest-bearing obligations and short-term bond funds.

Income taxes.

We have incurred net operating losses since inception. For the three and six-month periods ended June 30, 2017 and 2016, we have applied a 100% valuation allowance against our deferred tax asset as we believe that it is more likely than not that the deferred tax asset will not be realized.

Net Loss.

Our net loss was $3,879,901 and $8,847,030, respectively, for the three and six months ended June 30, 2017 ($0.05 and $0.11, respectively, per basic and diluted share) as compared to a net loss of $4,568,914 and $9,955,151, respectively, for the three and six months ended June 30, 2016 ($0.06 and $0.12, respectively, per basic and diluted share).

Non-GAAP Net Loss.

Our non-GAAP net loss, which excludes for the three and six months ended June 30, 2017 a gain of $210,331 and a loss of $186,904, respectively, associated with the change in the fair value of liability classified warrants, was $4,090,232 and $8,660,126 for the three and six months ended June 30, 2017 ($0.05 and $0.10 respectively, per basic and diluted share). Our non-GAAP net loss, which excludes for the three and six months ended June 30, 2016 a gain of $152,783 and a gain of $886,139, respectively, associated with the change in the fair value of liability classified warrants, was $4,721,697 and $10,841,290 for the three and six months ended June 30, 2016 ($0.06 and $0.13, respectively, per basic and diluted share).

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through equity issuances, government grants, and an investment by a strategic purchaser. At June 30, 2017, we had cash and cash equivalents and short-term investments aggregating $35.1 million and working capital of $33.9 million. At December 31, 2016, we had cash and cash equivalents and short-term investments aggregating $40.4 million and working capital of $39.4 million. At June 30, 2017, substantially all of our cash and cash equivalents were deposited with one financial institution, and such balances were in excess of federally insured limits.

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We have to date incurred operating losses, and we expect these losses to be substantial in the future as we expand our drug development programs and prepare for the commercialization of our drug candidates. We anticipate using current cash on hand to finance these activities. It will likely be some time before we obtain the necessary regulatory approvals to commercialize one or more of our product candidates in the United States.

Based on forecasts of available cash, we currently believe that we have sufficient resources to fund our operations for at least the next 12 months. These expectations are based on current information available to us. We will also require additional working capital to support our operations beyond that time.

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

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

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

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

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As of the date of this Form 10-Q, the full amount of our 2016 Shelf Registration Statement and the full amount of our 2017 Shelf Registration Statement remain available for future sales. However, if our public float (the market value of our common stock held by non-affiliate stockholders) were to fall below $75 million, we would be subject to a further limitation under which we could sell no more than one-third (1/3) of our public float during any 12-month period. Further, the number of shares that we can sell at any one time may be limited under certain circumstances to 20% of the outstanding common stock under applicable NASDAQ marketplace rules.

On March 19, 2017, the shelf registration statement that we filed with the SEC in 2014 (file No. 333-193699) expired.

Cash Flows

Net cash used in operating activities was $7,079,864 and $10,273,738, respectively, for the six-month periods ended June 30, 2017 and 2016. During the six months ended June 30, 2017, net cash used in operating activities was primarily attributable to our net loss of $8,847,030, decreases of $240,831 in accounts payable and $23,921 in accrued expenses and other liabilities. This was partially offset by a $426,386 decrease in prepaid expenses and other current assets and deposits, $186,904 of non-cash change in fair value of warrants liability and $1,418,628 of other non-cash expenses. During the six months ended June 30, 2016, net cash used in operating activities was primarily attributable to our net loss of $9,955,151, decreases of $1,086,835 in accounts payable and $36,572 in accrued expenses and other liabilities and $886,139 of non-cash change in fair value of warrants liability. This was partially offset by $853,761 decrease in prepaid expenses and other current assets and deposits and $837,198 of other non-cash expenses. Other non-cash expenses include depreciation and stock-based compensation expense.

Net cash used in investing activities during the six-month period ended June 30, 2017 was $34,910, consisting of the purchase of short-term investments. Net cash provided by investing activities during the six-month period ended June 30, 2016 was $767,091, consisting primarily of $949,283 of proceeds from certificates of deposit, offset by $88,929 of capital expenditures and $93,263 of purchase of short-term investments.

Net cash provided by financing activities during the six-month period ended June 30, 2017 was $1,805,437, consisting of the net proceeds from exercise of warrants. Net cash used in financing activities during the six-month period ended June 30, 2016 was $11,265, for payment of employee withholding tax related to stock based compensation.

Contractual Obligations

We have entered into the following contractual arrangements:

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Off-Balance Sheet Arrangements.

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

Caution Concerning Forward-Looking Statements

This Current Report on Form 10-Q contains “forward-looking statements”, as that term is defined in the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, plans or objectives for future operations and anticipated results of operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, “believes”, “anticipates”, “proposes”, “plans”, “expects”, “intends”, “may”, and other similar expressions are intended to identify forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. The forward-looking statements made in this report are based on current expectations that involve numerous risks and uncertainties.

The successful development and commercialization of our current drug candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing, or estimated expenses of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence due to the numerous risks and uncertainties associated with developing such products, including the uncertainty of:

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Our current plans and objectives are based on assumptions relating to the development of our current drug candidates. Although we believe that our assumptions are reasonable, any of our assumptions could prove

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inaccurate. In light of the significant uncertainties inherent in the forward-looking statements we have made herein, which reflect our views only as of the date of this report, you should not place undue reliance upon such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Our market risks during the three and six months ended June 30, 2017 have not materially changed from those discussed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.

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PART II. OTHER INFORMATION

The Company is not a party to any material legal proceedings.

There are many factors that affect our business, our financial condition, and the results of our operations. In addition to the information set forth in this quarterly report, you should carefully read and consider “Item 1A. Risk Factors” in Part I, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, of our 2016 Annual Report on Form 10–K filed with the SEC, which contain a description of significant factors that might cause our actual results of operations in future periods to differ materially from those currently expected or desired.

None

None

Not applicable

None

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SIGNATURES

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

Date: August 9, 2017

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Exhibit Index