(1) Organization and Business Activities

Acorda Therapeutics, Inc. (“Acorda” or the “Company”) is a biopharmaceutical company dedicated to the identification, development and commercialization of novel therapies that restore function and improve the lives of people with neurological disorders.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information, Accounting Standards Codification (ASC) Topic 270-10 and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In management’s opinion, all adjustments considered necessary for a fair presentation have been included in the interim periods presented and all adjustments are of a normal recurring nature.  The Company has evaluated subsequent events through the date of this filing.  Operating results for the three-month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  When used in these notes, the terms “Acorda” or “the Company” mean Acorda Therapeutics, Inc.  The December 31, 2015 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  You should read these unaudited interim condensed consolidated financial statements in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Certain reclassifications were made to prior period amounts in the interim consolidated financial statements and accompanying notes to conform with the current presentation.

(2) Summary of Significant Accounting Policies

Our critical accounting policies are detailed in our Annual Report on Form 10-K for the year ended December 31, 2015.  As of March 31, 2016, with the exception of the adoption of ASU 2015-03, our critical accounting policies have not changed materially from December 31, 2015.

Subsequent Events

Subsequent events are defined as those events or transactions that occur after the balance sheet date, but before the financial statements are filed with the Securities and Exchange Commission. The Company completed an evaluation of the impact of any subsequent events through the date these financial statements were issued, and determined the following subsequent events required disclosure in these financial statements.

Biotie acquisition

On April 18, 2016, the Company closed a tender offer for all of the outstanding capital stock of Biotie Therapies Corp. (“Biotie”), a Finland based company, pursuant to which the Company acquired approximately 93% of the fully diluted capital stock of Biotie (See Note 3).  On May 4, 2016, the Company acquired another approximately 4% of Biotie’s fully diluted capital stock pursuant to a subsequent public offer to Biotie stockholders that did not tender their shares in the initial tender offer.  The Company funded the initial and subsequent tender offers with approximately $357 million of existing cash on hand.  As a result of funding the tender offer, the Company’s cash balance has decreased as compared to the cash balance reported at March 31, 2016.

The Company will account for the transaction as a business combination following the acquisition method of accounting in accordance with ASC 805, Business Combinations.  The preparation of the closing financial statements for Biotie is currently underway and the Company will perform valuation procedures to determine the fair value of the assets acquired and liabilities assumed upon completion of the closing financial statements.  Therefore, the information necessary to determine the fair value of assets acquired and liabilities assumed is not available as of the date of these financial statements.  The Company incurred approximately $7.2 million in acquisition related expenses that are reflected in selling, general and administrative expenses for the three-month period ended March 31, 2016.  With the exception of the acquisition related expenses incurred, the acquisition of Biotie did not impact the Company’s unaudited consolidated financial statements for the three-month periods ended March 31, 2016 and 2015.

Recently Issued / Adopted Accounting Pronouncements

In April 2015, the FASB issued Accounting Standards Update 2015-03, “Interest — Imputation of Interest” (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset.  ASU-2014-15 is effective for fiscal years and interim periods therein beginning after December 15, 2015, with early adoption permitted.  The Company adopted this guidance retrospectively effective in the three-month period ended March 31, 2016.  The impact of the adoption of this guidance on the Company’s consolidated balance sheet as of December 31, 2015 was a reclassification of approximately $5.0 million representing the unamortized balance of debt issuance costs as of December 31, 2015 from Other Assets to the Convertible Senior Notes liability.

In March 2016, the FASB issued Accounting Standards Update 2016-09, “Compensation — Stock Compensation” (Topic 718).  The main objective of this update is to simplify the accounting, and reporting classifications for certain aspects of share-based payment transactions.  This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company is currently evaluating the new guidance to determine the impact it may have on its financial statements.

(3) Acquisitions

Biotie Therapies Corp. (Pending Acquisition)

In January 2016, the Company announced that it had entered into a combination agreement to acquire Biotie Therapies Corp. (“Biotie”) for a cash purchase price of approximately $363 million.  In accordance with the combination agreement, on April 18, 2016, the Company closed a public tender offer for all of Biotie’s capital stock, pursuant to which the Company acquired approximately 93% of the fully diluted capital stock of Biotie.  On May 4, 2016, the Company acquired another approximately 4% of Biotie’s fully diluted capital stock pursuant to a subsequent public offer to Biotie stockholders that did not tender their shares in the initial tender offer.  Accordingly, the Company currently owns approximately 97% of the fully diluted capital stock of Biotie.  The Company intends to acquire all remaining shares of Biotie capital stock that have not been tendered to the Company pursuant to compulsory redemption proceedings under Finnish law that the Company initiated in April 2016.  The Company expects to complete the acquisition of 100% of Biotie pursuant to these compulsory redemption proceedings in the second half of 2016.

Financing Transactions

Concurrently with the announcement of the Biotie acquisition, the Company announced two separate financing transactions.  The first was a private placement of 2,250,900 shares of the Company’s common stock for an aggregate purchase price of approximately $75 million.  The Company paid discounts and commissions of $2.3 million in connection with the private placement, which settled on January 26, 2016.  The Company used the net proceeds from the private placement to fund, in part, the acquisition of Biotie.  The Company also announced a commitment from JP Morgan Chase, N.A. for an asset-based credit facility for up to $60 million.  The closing of this credit facility is expected to occur in the second quarter of 2016.

Financial Instruments

The Company does not enter into hedging transactions in the normal course of business.  However, as a result of the Biotie acquisition which is to be completed in euros, the Company is exposed to fluctuations in exchange rates between the U.S. dollar and the euro until the completion of the transaction.  To mitigate this risk, the Company entered into foreign currency options to limit its exposure to fluctuations in exchange rates between the U.S. dollar and the euro until the transaction is completed.  The Company recorded the fair value of the options on its balance sheet and will recognize any gains or losses in earnings each period until the options expire or are canceled.  As of May 2, 2016, there were no remaining foreign currency options outstanding.  The Company currently owns approximately 97% of the fully diluted capital stock of Biotie, therefore, the risk of exposure to fluctuations in exchange rates between the U.S. dollar and the euro is no longer material to the Company.

The notional value of the foreign currency options was EUR 334 million (or approximately $363 million based on an average exchange rate of 1.0864 USD to 1.00 EUR from the last 5 trading days prior to January 15, 2016) as of March 31, 2016.

As of March 31, 2016, the Company had an unrealized gain on the options of approximately $10.3 million that is being reflected in other income.  The Company recorded approximately $11.6 million in other current assets and approximately $1.3 million in other current liabilities related to the options in the consolidated balance sheet at March 31, 2016. The options which are subject to a master netting arrangement are presented on a gross basis in the consolidated balance sheet.

(4) Share-based Compensation

During the three-month periods ended March 31, 2016 and 2015, the Company recognized share-based compensation expense of $8.1 million and $7.1 million, respectively.  Activity in options and restricted stock during the three-month period ended March 31, 2016 and related balances outstanding as of that date are reflected below.  The weighted average fair value per share of options granted to employees for the three-month periods ended March 31, 2016 and 2015 were approximately $15.28 and $16.25, respectively.

The following table summarizes share-based compensation expense included within the consolidated statements of operations:

A summary of share-based compensation activity for the three-month period ended March 31, 2016 is presented below:

Stock Option Activity

Restricted Stock Activity

Unrecognized compensation cost for unvested stock options, restricted stock awards and performance stock units as of March 31, 2016 totaled $78.5 million and is expected to be recognized over a weighted average period of approximately 2.5 years.

(5) Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three-month periods ended March 31, 2016 and 2015:

The difference between basic and diluted shares is that diluted shares include the dilutive effect of the assumed exercise of outstanding securities.  The Company’s stock options and unvested shares of restricted common stock could have the most significant impact on diluted shares.

Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the average closing price of the Company’s common stock during the period, because their inclusion would result in an anti-dilutive effect on per share amounts.

The following amounts were not included in the calculation of net income per diluted share because their effects were anti-dilutive:

Additionally, the impact of the convertible debt was determined to be anti-dilutive and excluded from the calculation of net loss per diluted share for the three-month periods ended March 31, 2016 and 2015.

(6) Income Taxes

For the three-month periods ended March 31, 2016 and 2015, the Company recorded a $9.7 million benefit and $2.0 million benefit from income taxes, respectively based upon its estimated annual effective tax rate.  The benefit for income taxes is based on federal, state and Puerto Rico income taxes, net of any tax credits.  The effective income tax rates for the Company for the three-month periods ended March 31, 2016 and 2015 were 95% and 40%, respectively.  The variance in the effective tax rates for the three-month period ended March 31, 2016 as compared to the three-month period ended March 31, 2015 was due primarily to the Company being able to receive a benefit in 2016 for the Federal research and development tax as a result of passed legislation making the tax credit permanent.  The Company was not able to benefit from the Federal research and development credit for the three-month period ending March 31, 2015, however, the Company was able to receive the benefit for this tax credit in the effective tax rate at December 31, 2015.

The Company continues to evaluate the realizability of its deferred tax assets and liabilities on a quarterly basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of products currently under development.  Any changes to the valuation allowance or deferred tax assets and liabilities in the future would impact the Company’s income taxes.

(7) Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.  Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates, exchange rates and yield curves.  Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability.  The Company’s Level 1 assets consist of time deposits and investments in a Treasury money market fund and the Company’s Level 2 assets consist of foreign currency options that are valued using market exchange rates which are observable and high-quality government bonds that are valued using observable market prices.  The Company’s Level 3 liabilities represent acquired contingent consideration related to the acquisition of Civitas and are valued using a probability weighted discounted cash flow valuation approach.  No changes in valuation techniques occurred during the three-month period ended March 31, 2016.  The estimated fair values of all of our financial instruments approximate their carrying values at March 31, 2016, except for the fair value of the Company’s convertible senior notes, which was approximately $305.5 million as of March 31, 2016.  The Company estimates the fair value of its notes utilizing market quotations for the debt (Level 2).

The following table presents additional information about liabilities measured at fair value on a recurring basis and for which the Company utilizes Level 3 inputs to determine fair value.

Acquired contingent consideration

The Company estimates the fair value of its acquired contingent consideration using a probability weighted discounted cash flow valuation approach based on estimated future sales expected from CVT-301, a phase 3 candidate for the treatment of OFF periods of Parkinson’s disease and CVT-427, a Phase I candidate.  CVT-427 is an inhaled triptan intended for acute treatment of migraine using the ARCUS delivery system.  Using this approach, expected future cash flows are calculated over the expected life of the agreement, are discounted, and then exercise scenario probabilities are applied.  Some of the more significant assumptions made in the valuation include (i) the estimated CVT-301 and CVT 427 revenue forecasts, (ii) probabilities of success, and (iii) discount periods and rate.  The probability of achievement of revenue milestones ranged from 43.9% to 70% with milestone payment outcomes ranging from $0 to $60 million in the aggregate for CVT-301 and CVT-427.  The valuation is performed quarterly.  Gains and losses are included in the statement of operations.  For the three-month period ended March 31, 2016, changes in the fair value of the acquired contingent consideration were due to the re-calculation of cash flows for the passage of time and updates to certain other estimated assumptions.

The acquired contingent consideration is classified as a Level 3 liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market.  If different assumptions were used for the various inputs to the valuation approach, including but not limited to, assumptions involving probability adjusted sales estimates for CVT-301 and CVT-427 and estimated discount rates, the estimated fair value could be significantly higher or lower than the fair value determined.

(8) Investments

The Company held no short-term available-for-sale debt securities at March 31, 2016 as compared to $200.1 million at December 31, 2015 as these investments were either sold or matured during the three-month period ended March 31, 2016 to facilitate the Biotie acquisition.  As a result of the sale of certain available-for-sale debt securities, the Company recognized a gain of approximately $0.03 million in the three-month period ended March 31, 2016.  The contractual maturities of available-for-sale debt securities held at December 31, 2015 were greater than 3 months but less than 1 year.

Short-term investments with maturities of three months or less from date of purchase have been classified as cash equivalents, and amounted to $357.7 million and $83.5 million as of March 31, 2016 and December 31, 2015, respectively.

Unrealized holding gains and losses are reported within accumulated other comprehensive (loss) (AOCI) in the statements of comprehensive income.  The changes in AOCI associated with the unrealized holding (losses) on available-for-sale investments during the three-month period ended March 31, 2016, were as follows (in thousands):

(9) Collaborations, Alliances, and Other Agreements

Biogen

The Company has an exclusive collaboration and license agreement with Biogen Inc. (formerly Biogen Idec International GmbH), or Biogen, as of June 2009 to develop and commercialize Ampyra (known as Fampyra outside the U.S.) in markets outside the U.S. (the “Collaboration Agreement”).  The Company also entered into a related supply agreement with Biogen (the “Supply Agreement”), pursuant to which the Company will supply Biogen with its requirements for the licensed products through the Company’s existing supply agreement with Alkermes.

Under the Collaboration Agreement, the Company received an upfront payment of $110.0 million in June 2009, and a $25 million milestone payment in August 2011.  As a result of the upfront payment from Biogen, the Company also made a $7.7 million payment to Alkermes.  The upfront payment from Biogen was recorded as deferred revenue and the payment to Alkermes was recorded as deferred expense.  The Company is also entitled to receive additional payments of up to $10 million based on the successful achievement of future regulatory milestones and up to $365 million based on the successful achievement of future sales milestones.  Due to the uncertainty surrounding the achievement of the future regulatory and sales milestones, these payments will not be recognized as revenue unless and until they are earned.

The Company recognized $2.3 million in license revenue, a portion of the $110.0 million received from Biogen, and $0.2 million in cost of license revenue, a portion of the $7.7 million paid to Alkermes, during the three-month periods ended March 31, 2016 and 2015, respectively.  The Company currently estimates the recognition period to be approximately 12 years from the date of the Collaboration Agreement.

As part of its ex-U.S. license agreement, Biogen owes Acorda royalties based on ex-U.S. net sales, and milestones based on ex-U.S. regulatory approval and new indications.  The Company recognized $2.5 million and $2.3 million in royalty revenue, respectively, for the three-month periods ended March 31, 2016 and 2015, related to ex-U.S. sales of Fampyra by Biogen.

Allergan/Watson

The Company has an agreement with an Allergan plc subsidiary (originally Watson Pharma, Inc.), or Allergan, to market tizanidine hydrochloride capsules, an authorized generic version of Zanaflex Capsules which was launched in February 2012.  In accordance with the agreement, the Company receives a royalty based on Allergan’s gross margin, as defined by the agreement, of the authorized generic product. During the three-month periods ended March 31, 2016 and 2015, the Company recognized royalty revenue of $1.0 million and $1.8 million, respectively, related to the gross margin of the Zanaflex Capsule authorized generic.  During the three-month periods ended March 31, 2016 and 2015, the Company also recognized revenue and a corresponding cost of sales of $0.6 million and $0.2 million, respectively, related to the purchase and sale of the related Zanaflex Capsule authorized generic product to Allergan, which is recorded in net product revenues and cost of sales.

(10) Commitments and Contingencies

A summary of the Company’s commitments and contingencies was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  The Company’s long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business.

The Company is currently party to various legal proceedings which are principally patent litigation matters.  The Company has assessed such legal proceedings and does not believe that it is probable that a liability has been incurred or that the amount of any potential liability or range of losses can be reasonably estimated.  As a result, the Company did not record any loss contingencies for any of these matters.  While it is not possible to determine the outcome of these matters the Company believes that the resolution of all such matters will not have a material adverse effect on its consolidated financial position or liquidity, but could possibly be material to the Company’s consolidated results of operations in any one accounting period.  Litigation expenses are expensed as incurred.

Subsequent Events

Subsequent events are defined as those events or transactions that occur after the balance sheet date, but before the financial statements are filed with the Securities and Exchange Commission. The Company completed an evaluation of the impact of any subsequent events through the date these financial statements were issued, and determined the following subsequent events required disclosure in these financial statements.

Biotie acquisition

On April 18, 2016, the Company closed a tender offer for all of the outstanding capital stock of Biotie Therapies Corp. (“Biotie”), a Finland based company, pursuant to which the Company acquired approximately 93% of the fully diluted capital stock of Biotie (See Note 3).  On May 4, 2016, the Company acquired another approximately 4% of Biotie’s fully diluted capital stock pursuant to a subsequent public offer to Biotie stockholders that did not tender their shares in the initial tender offer.  The Company funded the initial and subsequent tender offers with approximately $357 million of existing cash on hand.  As a result of funding the tender offer, the Company’s cash balance has decreased as compared to the cash balance reported at March 31, 2016.

The Company will account for the transaction as a business combination following the acquisition method of accounting in accordance with ASC 805, Business Combinations.  The preparation of the closing financial statements for Biotie is currently underway and the Company will perform valuation procedures to determine the fair value of the assets acquired and liabilities assumed upon completion of the closing financial statements.  Therefore, the information necessary to determine the fair value of assets acquired and liabilities assumed is not available as of the date of these financial statements.  The Company incurred approximately $7.2 million in acquisition related expenses that are reflected in selling, general and administrative expenses for the three-month period ended March 31, 2016.  With the exception of the acquisition related expenses incurred, the acquisition of Biotie did not impact the Company’s unaudited consolidated financial statements for the three-month periods ended March 31, 2016 and 2015.

Recently Issued / Adopted Accounting Pronouncements

In April 2015, the FASB issued Accounting Standards Update 2015-03, “Interest — Imputation of Interest” (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset.  ASU-2014-15 is effective for fiscal years and interim periods therein beginning after December 15, 2015, with early adoption permitted.  The Company adopted this guidance retrospectively effective in the three-month period ended March 31, 2016.  The impact of the adoption of this guidance on the Company’s consolidated balance sheet as of December 31, 2015 was a reclassification of approximately $5.0 million representing the unamortized balance of debt issuance costs as of December 31, 2015 from Other Assets to the Convertible Senior Notes liability.

In March 2016, the FASB issued Accounting Standards Update 2016-09, “Compensation — Stock Compensation” (Topic 718).  The main objective of this update is to simplify the accounting, and reporting classifications for certain aspects of share-based payment transactions.  This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company is currently evaluating the new guidance to determine the impact it may have on its financial statements.