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HORIZON PHARMACEUTICAL LLC 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
raptor10q113009.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period endedNovember 30, 2009
[
]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to __________

Commission file number 000-25571

Raptor Pharmaceutical Corp.
(Exact name of registrant as specified in its charter)
 
Delaware
 
86-0883978
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
9 Commercial Blvd., Suite 200, Novato, CA 94949
(Address of principal executive offices)
 
 
(415) 382-8111
(Registrant’s telephone number, including area code)
 
 
TorreyPines Therapeutics, Inc., P.O. Box 231386, Encinitas, CA  92023-1386, December 31
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]     No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  [  ]    No   [X ]      
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   [  ]
 
 
 
Accelerated filer    [  ]
   
Non-accelerated filer    [  ]  (Do not check if a smaller reporting company)
 
Smaller reporting company    [ X ]
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [ ]  No [X]

There were 22,579,515 shares of the registrant’s common stock, $.001 par value per share, outstanding at January 11, 2010.

 
 

 


RAPTOR PHARMACEUTICAL CORP.

Table of Contents
   
Page
Part 1 - Financial Information
Item 1
Financial Statements
 
 
Condensed Consolidated Balance Sheets as of November 30, 2009 (unaudited) and August 31, 2009
2
 
Unaudited Condensed Consolidated Statements of Operations for the three month periods ended November 30, 2009 and 2008 and the cumulative period from September 8, 2005 (inception) to November 30, 2009
3
 
Unaudited Condensed Consolidated Statements of Cash Flows for the three month periods ended November 30, 2009 and 2008 and the cumulative period from September 8, 2005 (inception) to November 30, 2009
5
 
Notes to Condensed Consolidated Financial Statements
6
Item 2
Management’s Discussion and Analysis and Results  of Operations
27
Item 3
Quantitative and Qualitative Disclosures About Market Risk
46
Item 4
Controls and Procedures
46
Part II - Other Information
Item 1
Legal Proceedings
47
Item 1A
Risk Factors
47
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
65
Item 3
Defaults Upon Senior Securities
65
Item 4
Submission of Matters to a Vote of Security Holders
65
Item 5
Other Information
65
Item 6
Exhibits
65
SIGNATURES
67


 
 

 
 


 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements.

Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Balance Sheets
 
         
November 30, 2009
 
August 31, 2009
ASSETS
 
(unaudited)
 
(1)
Current assets:
             
 
Cash and cash equivalents
 
 $
1,164,808
 
 $
     3,701,787
 
Prepaid expenses and other
   
231,958
   
        107,054
Total current assets
 
 
1,396,766
 
 
3,808,841
                   
Intangible assets, net
   
3,627,667
   
2,524,792
Goodwill
     
3,275,403
   
-
Fixed assets, net
     
130,868
   
        144,735
Deposits
   
 
100,206
 
 
        100,206
   
Total assets
 
$
8,530,910
 
$
6,578,574
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
                   
Liabilities
             
Current liabilities:
             
 
Accounts payable
 
 $
1,102,197
 
 $
        613,577
 
Accrued liabilities
   
844,282
   
        451,243
 
Deferred rent
     
496
 
 
-
 
Capital lease liability – current
 
 
4,292
 
 
            4,117
Total current liabilities
 
 
1,951,267
 
 
     1,068,937
                   
Capital lease liability - long-term
   
5,535
   
                  6,676
Total liabilities
     
1,956,802
 
 
1,075,613
                   
 
Commitments and contingencies
           
                   
Stockholders’ equity:
           
 
Preferred stock, $0.001 par value, 15,000,000 shares authorized, zero shares issued and        outstanding
   
-
 
 
-
 
Common stock, $0.001 par value, 150,000,000 shares authorized 18,831,957 and 17,857,555 shares issued and outstanding as at November 30, 2009 and
           
 
  August 31, 2009, respectively
   
18,832
   
          17,858
 
Additional paid-in capital
   
31,373,131
   
   27,364,286
 
Deficit accumulated during development stage
 
 
(24,817,855)
 
 
(21,879,183)
Total stockholders’ equity
 
 
6,574,108
 
 
     5,502,961
   
Total liabilities and stockholders’ equity
 
 $
8,530,910
 
 $
   6,578,574
(1) Derived from the Company’s audited consolidated financial statements as of August 31, 2009.
The accompanying notes are an integral part of these financial statements.






-2-

 
 
 

 
 


Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
               
     
For the three month periods from September 1, to November 30,
     
2009
 
2008
               
 Revenues:
$
-
 
$
-
               
Operating expenses:
         
       General and administrative
 
1,010,076
   
659,689
       Research and development
 
1,930,836
   
1,820,400
              Total operating expenses
 
2,940,912
   
2,480,089
     
 
       
 Loss from operations
 
(2,940,912)
   
(2,480,089)
               
      Interest income
 
3,265
   
21,777
      Interest expense
 
(1,025)
   
(686)
             Net loss
$
(2,938,672)
 
$
(2,458,998)
               
Net loss per share:
         
       Basic and diluted
$
(0.16)
 
$
(0.17)
               
Weighted average shares
         
      outstanding used to compute:
         
         Basic and diluted
 
18,520,579
   
14,074,849
               
               
The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-3-
 




Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
       
For the cumulative period from September 8, 2005 (inception) to November 30, 2009
           
 Revenues:
 
$
-
           
Operating expenses:
     
       General and administrative
   
7,966,316
       Research and development
   
16,805,120
 
In-process research and development
   
240,625
              Total operating expenses
   
25,012,061
       
 
 
 Loss from operations
   
(25,012,061)
           
      Interest income
   
305,168
      Interest expense
 
 
(110,962)
             Net loss
 
$
(24,817,855)
           
           
           
The accompanying notes are an integral part of these financial statements.










 
 








 
 
-4-

 
 
 

 
 


Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
       
For the three month periods from
 
For the cumulative period from September 8, 2005
September 1, 2009 to November 30, 2009
 
September 1, 2008 to November 30, 2008
 (inception) to November 30, 2009
Cash flows from operating activities:
                 
 
Net loss
 
$
(2,938,672)
 
$
(2,458,998)
 
$
(24,713,460)
 
Adjustments to reconcile net loss to net cash used in operating activities:
                 
 
Employee stock-based compensation exp.
   
25,803
   
116,518
   
1,240,830
 
Consultant stock-based compensation exp.
   
65,200
   
12,993
   
472,813
 
Amortization of intangible assets
   
37,124
   
34,626
   
282,332
 
Depreciation of fixed assets
   
17,169
   
21,996
   
368,110
 
In-process research and development
   
-
   
-
   
240,625
 
Amortization of capitalized finder’s fee
   
-
   
-
   
102,000
 
Capitalized acquisition costs previously expensed
   
-
   
-
   
38,000
 
Changes in assets and liabilities:
                 
   
Prepaid expenses and other
   
(124,903)
   
(79,560)
   
(132,519)
   
Intangible assets
   
-
   
-
   
(150,000)
   
Deposits
   
-
   
-
   
(100,207)
   
Accounts payable
   
488,620
   
74,158
   
1,102,197
   
Accrued liabilities
   
(393,040)
   
29,080
   
59,161
   
Deferred rent
 
 
496
   
91
 
 
391
   
Net cash used in operating activities
 
 
(2,617,518)
   
(2,249,096)
 
 
(21,189,727)
 
Cash flows from investing activities:
                 
   
Purchase of fixed assets
 
 
(3,303)
   
(3,592)
 
 
(479,653)
   
Cash acquired in 2009 Merger
   
581,395
   
-
   
581,394
   
Net cash from investing activities
   
578,092
   
(3,592)
   
101,741
 
Cash flows from financing activities:
                 
   
Proceeds from the sale of common stock
   
-
   
-
   
17,386,000
   
Proceeds from the exercise of common stock warrants
   
56,020
   
-
   
6,565,520
   
Proceeds from the exercise of common stock options
   
4,750
   
-
   
13,448
   
Fundraising costs
   
(557,358)
   
(20,296)
   
(2,012,679)
   
Proceeds from the sale of common stock to initial investors
   
-
   
-
   
310,000
   
Proceeds from bridge loan
   
-
   
-
   
200,000
   
Repayment of bridge loan
   
-
   
-
   
(200,000)
   
Principal payments on capital lease
   
(965)
   
(770)
   
(9,495)
 
Net cash provided by (used in) financing activities
 
 
(497,553)
 
 
(21,066)
 
 
22,252,794
 
Net increase (decrease) in cash and cash equivalents
   
(2,536,979)
   
(2,273,754)
   
1,164,808
 
Cash and cash equivalents, beginning of period
 
 
3,701,787
 
 
7,546,912
 
 
-
 
Cash and cash equivalents, end of period
 
$
1,164,808
 
$
5,273,158
 
$
1,164,808
Supplemental disclosure of non-cash financing activities:
                 
   
Common stock and warrants issued in connection with reverse merger
 
$
4,415,403
 
$
-
 
$
4,415,403
   
Acquisition of equipment in exchange for capital lease
 
$
-
 
$
14,006
 
$
21,403
   
Notes receivable issued in exchange for common stock
 
$
-
 
$
-
 
$
110,000
   
Common stock issued for a finder’s fee
 
$
-
 
$
-
 
$
102,000
   
Common stock issued in asset purchase
 
$
-
 
$
-
 
$
2,898,624
The accompanying notes are an integral part of these financial statements.
   
                                    -5-
   
RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(1) NATURE OF OPERATIONS AND BUSINESS RISKS

The accompanying condensed consolidated financial statements reflect the results of operations of Raptor Pharmaceutical Corp. (the “Company” or “Raptor”) and have been prepared in accordance with the accounting principles generally accepted in the United States of America.
 
On July 28, 2009, the Company and ECP Acquisition, Inc., a Delaware corporation, the Company’s then-wholly-owned subsidiary, herein referred to as merger sub, entered into an Agreement and Plan of Merger and Reorganization, herein referred to as the 2009 Merger Agreement, with Raptor Pharmaceuticals Corp. (“RPC”), a Delaware corporation. On September 29, 2009, on the terms and subject to the conditions set forth in the 2009 Merger Agreement, pursuant to a stock-for-stock reverse triangular merger, herein referred to as the 2009 Merger, merger sub was merged with and into Raptor Pharmaceuticals Corp. and Raptor Pharmaceuticals Corp. survived such 2009 Merger as the Company’s wholly-owned subsidiary. Immediately prior to such 2009 Merger and in connection therewith, the Company effected a 1-for-17 reverse stock split of its common stock and changed its corporate name from “TorreyPines Therapeutics, Inc.” to “Raptor Pharmaceutical Corp.”
 
As a result of the 2009 Merger and in accordance with the 2009 Merger Agreement, each share of Raptor Pharmaceuticals Corp.’s common stock outstanding immediately prior to the effective time of the 2009 Merger was converted into the right to receive 0.2331234 shares of our common stock, on a post 1-for-17 reverse-split basis. Each option and warrant to purchase Raptor Pharmaceuticals Corp.’s common stock outstanding immediately prior to the effective time of the 2009 Merger was assumed by the Company at the effective time of the 2009 Merger, with each share of such common stock underlying such options and warrants being converted into the right to receive 0.2331234 shares of the Company’s common stock, on a post 1-for-17 reverse split basis, rounded down to the nearest whole share of the Company’s common stock. Following the 2009 Merger, each such option or warrant has an exercise price per share of the Company’s common stock equal to the quotient obtained by dividing the per share exercise price of such common stock subject to such option or warrant by 0.2331234, rounded up to the nearest whole cent.
 
Immediately following the effective time of the 2009 Merger, Raptor Pharmaceuticals Corp.’s (as of immediately prior to the 2009 Merger) stockholders owned approximately 95% of the Company’s outstanding common stock and the Company’s (as of immediately prior to the 2009 Merger) stockholders owned approximately 5% of the Company’s outstanding common stock.
 
Raptor Pharmaceuticals Corp., the Company’s wholly-owned subsidiary, was the “accounting acquirer,” and for accounting purposes, the Company was deemed as having been “acquired” in the 2009 Merger.  The board of directors and officers that managed and operated Raptor Pharmaceuticals Corp. immediately prior to the effective time of the 2009 Merger became the Company’s board of directors and officers.  Additionally, following the effective time of the 2009 Merger, the business conducted by Raptor Pharmaceuticals Corp. immediately prior to the effective time of the 2009 Merger became primarily the business conducted by the Company.
 
                      The following reflects the Company’s current, post 2009 Merger corporate structure (incorporation State):
 
Raptor Pharmaceutical Corp., formerly TorreyPines Therapeutics, Inc. (Delaware)
 
|                                                    |
 
TPTX, Inc. (Delaware)                                                      Raptor Pharmaceuticals Corp. (Delaware)
 
         |                                        |
 
Raptor Therapeutics Inc. (Delaware)   Raptor Discoveries Inc. (Delaware)
(f/k/a  Bennu Pharmaceuticals Inc.)                                                                     (f/k/a Raptor Pharmaceutical Inc.)

Raptor is a publicly-traded biotechnology company dedicated to speeding the delivery of new treatment options to patients by enhancing existing therapeutics through the application of highly specialized drug targeting platforms and formulation expertise. The Company focuses on underserved patient populations where it can have the greatest potential impact. Raptor’s preclinical division bioengineers novel drug candidates and drug-targeting platforms derived from the human receptor-associated protein (“RAP”) and related proteins, while Raptor’s clinical




-6-

 
 
 

 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

division advances clinical-stage product candidates towards marketing approval and commercialization. Raptor’s clinical programs include DR Cysteamine for the potential treatment of nephropathic cystinosis, non-alcoholic steatohepatitis (“NASH”), and Huntington’s Disease. Raptor also has two clinical stage product candidates in which the Company is seeking to out-license or form a development partnership: ConviviaTM for the potential treatment of aldehyde dehydrogenase (“ALDH2”) deficiency; and Tezampanel and NGX426, a non-opioid solution designed to treat chronic pain. Raptor’s preclinical programs target cancer, neurodegenerative disorders and infectious diseases. HepTide™ is designed to utilize engineered RAP-based peptides conjugated to drugs to target delivery to the liver to potentially treat primary liver cancer and hepatitis. NeuroTrans™ represents engineered RAP peptides created to target receptors in the brain and are currently, in collaboration with Roche, undergoing preclinical evaluation for their ability to enhance the transport of therapeutics across the blood-brain barrier. WntTide™ is based upon Mesd and Mesd peptides that the Company is studying in a preclinical breast cancer model for WntTide™’s potential inhibition of Wnt signaling through LRP5, which may block cancers dependent on signaling through LRP5 or LRP6. Raptor is also examining Tezampanel and NGX426, for the treatment of thrombotic disorder. The Company’s fiscal year end is August 31.

The Company is subject to a number of risks, including: the need to raise capital through equity and/or debt financings; the uncertainty whether the Company’s research and development efforts will result in successful commercial products; competition from larger organizations; reliance on licensing proprietary technology of others; dependence on key personnel; uncertain patent protection; and dependence on corporate partners and collaborators.

See the section titled “Risk Factors” in Part II Item 1A of this Quarterly Report on Form 10-Q.
 
 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(a) Basis of Presentation

The Company’s condensed consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries, Raptor Pharmaceuticals Corp., Raptor Discoveries Inc., Raptor Therapeutics Inc., and TPTX, Inc. incorporated in Delaware on May 5, 2006, September 8, 2005 (date of inception), August 1, 2007, and April 24, 2000, respectively. All inter-company accounts have been eliminated. The Company’s condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Through November 30, 2009, the Company had accumulated losses of approximately $24.8 million. Management expects to incur further losses for the foreseeable future. Management believes that the Company’s cash and cash equivalents at November 30, 2009 along with the net funds raised subsequent to quarter-end in December 2009 of approximately $6.9 million (see the subsequent event Note 12) will be sufficient to meet the Company’s obligations into the third calendar quarter of 2010. The Company is currently in the process of negotiating strategic partnerships and collaborations in order to fund its preclinical and clinical programs into 2011. If the Company is not able to close a strategic transaction, the Company anticipates raising additional capital in the second calendar quarter of 2010. If the Company is not able to obtain funds either through a strategic transaction or through the sale of its equity, it may not be able to continue as a going concern.  Until the Company can generate sufficient levels of cash from its operations, the Company expects to continue to finance future cash needs primarily through proceeds from equity or debt financings, loans and collaborative agreements with corporate partners or through a business combination with a company that has such financing in order to be able to sustain its operations until the Company can achieve profitability and positive cash flows, if ever.

On September 29, 2009, upon the closing of the merger with RPC (as discussed further in the Note 9, Issuance of Common Stock), RPC’s stockholders exchanged each share of RPC’s common stock into .2331234 shares of the post-merger company and the exercise prices and stock prices were divided by .2331234 to reflect the post-merger equivalent stock prices and exercise prices. Therefore, all shares of common stock and exercise prices of common stock options and warrants are reported in these condensed consolidated financial statements on a post-merger basis.

The Company’s independent registered public accounting firm has audited our consolidated financial statements for the years ended August 31, 2009 and 2008. The October 27, 2009 audit opinion included a paragraph indicating substantial doubt as to the Company’s ability to continue as a going concern due to the fact that the Company is in the development stage and has not generated any revenue to date.



-7-
 
RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Management plans to seek additional debt and/or equity financing for the Company through private or public offerings or through a business combination or strategic partnership, but it cannot assure that such financing or transaction will be available on acceptable terms, or at all. The uncertainty of this situation raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the failure to continue as a going concern.
 
(b) Use of Estimates
 
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
(c) Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments including cash and cash equivalents, prepaid expenses, accounts payable, accrued liabilities and capital lease liability approximate fair value due to their short maturities.
 
(d) Segment Reporting

The Company has determined that it operates in two operating segments, preclinical development and clinical development. Operating segments are components of an enterprise for which separate financial information is available and are evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer assesses the Company’s performance and allocates its resources. Below is a break-down of the Company’s net loss and total assets by operating segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three month period ended November 30,
 
 
 
2009
 
 
2008
 
 
 
Preclinical
 
 
Clinical
 
 
Total
 
 
Preclinical
 
 
Clinical
 
 
Total
 
Net loss
 
$
(949,726)
 
 
$
(1,988,946)
 
 
$
(2,938,672)
 
 
$
(796,343)
 
 
$
(1,662,655)
 
 
$
(2,458,998)
 
Total assets
 
 
498,524
 
 
 
8,032,386
 
 
 
8,530,910
 
 
 
1,463,910
 
 
 
6,921,564
 
 
 
8,385,474
 
 
 
(e) Cash and Cash Equivalents
 
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
 
(f) Intangible Assets

Intangible assets include the intellectual property and other rights relating to DR Cysteamine, to the RAP technology and to the out-license and the rights to NGX 426 acquired in the 2009 Merger. The intangible assets related to DR Cysteamine and the RAP technology are amortized using the straight-line method over the estimated useful life of 20 years, which is the life of the intellectual property patents. The 20 year estimated useful life is also based upon the typical development, approval, marketing and life cycle management timelines of pharmaceutical drug products.  The intangible assets related to the out-license will be amortized using the straight-line method over the estimated useful life of 16 years, which is the life of the intellectual property patents. The intangible assets related to NGX 426, which has been classified as in-process research and development, will not be amortized until development is completed.
 
(g) Goodwill
 
Goodwill represents the excess of the value of the purchase consideration over the identifiable assets acquired in the 2009 Merger.  Goodwill will be reviewed annually, or when an indication of impairment exists, to determine if any impairment analysis and resulting write-down in valuation is necessary.
 
(h) Fixed Assets

Fixed assets, which mainly consist of leasehold improvements, lab equipment, computer hardware and software and capital lease equipment, are stated at cost. Depreciation is computed using the straight-line method over the related estimated
-8-


RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

useful lives, except for leasehold improvements and capital lease equipment, which are depreciated over the shorter of the useful life of the asset or the lease term. Significant additions and improvements that have useful lives estimated at greater than one year are capitalized, while repairs and maintenance are charged to expense as incurred.
 
(i) Impairment of Long-Lived Assets

The Company evaluates its long-lived assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows. The Company has not identified any such impairment losses to date.
 
(j) Income Taxes

Income taxes are recorded under the liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
(k) Research and Development
 
The Company is an early development stage company. Research and development costs are charged to expense as incurred. Research and development expenses include scientists’ salaries, lab collaborations, preclinical studies, clinical trials, clinical trial materials, regulatory and clinical consultants, lab supplies, lab services, lab equipment maintenance and small equipment purchased to support the research laboratory, amortization of intangible assets and allocated executive, human resources and facilities expenses.
 
(l) In-Process Research and Development

Prior to September 1, 2009, the Company recorded in-process research and development expense for a product candidate acquisition where there is not more than one potential product or usage for the assets being acquired. Upon the adoption of the revised guidance on business combinations, effective September 1, 2009, the fair value of acquired in-process research and development is capitalized and tested for impairment at least annually.  Upon completion of the research and development activities, the intangible asset is amortized into earnings over the related products useful life. The Company reviews each product candidate acquisition to determine the existence of in-process research and development.
 
(m) Net Loss per Share

Net loss per share is calculated by dividing net loss by the weighted average shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average shares of common stock outstanding and potential shares of common stock during the period. For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted net loss per share as their effect is anti-dilutive. Potentially dilutive securities include:

 
 
 
 
 
 
 
 
 
 
 
November 30,
 
 
 
2009
 
 
2008
 
Warrants to purchase common stock
 
 
2,020,793
     
3,090,814
 
Options to purchase common stock
 
 
1,196,163
     
925,087
 
Total potentially dilutive securities
 
 
3,216,956
     
4,015,901
 
 
 
 
 
 
 
 
  (n) Stock Option Plan

Effective September 1, 2006, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Accounting for Compensation Arrangements, (“ASC 718”) (previously listed as SFAS No. 123 (revised 2004)), Share-Based Payment. in accounting for its 2006 Equity Incentive Plan, as amended.

-9-

 
 
 

 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 Under ASC 718, compensation cost is measured at the grant date based on the fair value of the equity instruments awarded and is recognized over the period during which an employee is required to provide service in exchange for the award, or the requisite service period, which is usually the vesting period. The fair value of the equity award granted is estimated on the date of the grant. The Company previously applied Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provided the required pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation. The Company accounts for stock options issued to third parties, including consultants, in accordance with the provisions of the FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, (“ASC 505-50”) (previously listed as Emerging Issues Task Force (“EITF”) Consensus No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services). See Note 8, Stock Option Plan, for further discussion of employee stock-based compensation.
 
(o) Recent Accounting Pronouncements

In September 2006, ASC Topic 820, Fair Value Measurements (“ASC 820”) (previously listed as the FASB issued SFAS No. 157, Fair Value Measurements). ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of ASC 820 are to be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of ASC 820 are effective for fiscal years beginning after November 15, 2007; therefore, the Company adopted ASC 820 as of September 1, 2008 for financial assets and liabilities. In accordance with FASB Staff Position 157-2, Effective Date of ASC 820, the Company adopted  the provisions of ASC 820 for its non-financial assets and non-financial liabilities on September 1, 2009 and has determined that it had no material impact on the Company’s results for the three months ended November 30, 2009. See Note 5, Fair Value Measurements, regarding the disclosure of the Company’s value of its cash equivalents.

In February 2007, the FASB issued ASC Topic 825, Financial Instruments, (“ASC 825”) (previously SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115), which permits the measurement of many financial instruments and certain other asset and liabilities at fair value on an instrument-by-instrument basis (the fair value option). The guidance is applicable for fiscal years beginning after November 15, 2007; therefore, the Company adopted ASC 825 as of September 1, 2008. The Company has determined that ASC 825 had no material impact  on its financial results for the three months ended November 30, 2009.

In June 2007, the EITF reached a consensus on ASC Topic 730, Research and Development, (“ASC 730”) (previously EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities). ASC 730 specifies the timing of expense recognition for non-refundable advance payments for goods or services that will be used or rendered for research and development activities. ASC 730 was effective for fiscal years beginning after December 15, 2007, and early adoption is not permitted; therefore, the Company adopted ASC 730 as of September 1, 2008. The Company has determined that ASC 730 had no material impact on its financial results for the three months ended November 30, 2009.

In December 2007, the EITF reached a consensus on ASC Topic 808, Collaborative Agreement, (“ASC 808”) (previously EITF 07-01, Accounting for Collaborative Arrangements).  ASC 808 discusses the appropriate income statement presentation and classification for the activities and payments between the participants in arrangements related to the development and commercialization of intellectual property. The sufficiency of disclosure related to these arrangements is also specified. ASC 808 is effective for fiscal years beginning after December 15, 2008. As a result, ASC 808 is effective for the Company as of September 1, 2009.  Based upon the nature of the Company’s business, ASC 808 could have a material impact on its financial position and consolidated results of operations in future years, but had no material impact for the three months ended November 30, 2009.

In December 2007, FASB issued ASC Topic 805, Business Combinations, (“ASC 805”) (previously SFAS 141(R) and FASB ASC Topic 810, Consolidation (“ASC 810”) (previously SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51).  These statements will significantly change the financial accounting and reporting of business combination transactions and non-controlling (or minority) interests in consolidated financial statements. ASC 805 requires companies to: (i) recognize, with certain exceptions, 100% of the fair values of assets acquired, liabilities assumed, and non-controlling interests in acquisitions of less than a 100% controlling interest when the acquisition constitutes a change in control of the acquired entity; (ii) measure acquirer shares issued in consideration for a business combination at fair value on the

-10-

 
 
 

 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

acquisition date; (iii) recognize contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings; (iv) with certain exceptions, recognize pre-acquisition loss and gain contingencies at their acquisition-date fair values; (v) capitalize in-process research and development (“IPR&D”) assets acquired; (vi) expense, as incurred, acquisition-related transaction costs; (vii) capitalize acquisition-related restructuring costs only if the criteria in ASC 420, Exit and Disposal Cost Obligations, (previously SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities), are met as of the acquisition date; and (viii) recognize changes that result from a business combination transaction in an acquirer’s existing income tax valuation allowances and tax uncertainty accruals as adjustments to income tax expense. ASC 805 is required to be adopted concurrently with ASC 810 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (the Company’s fiscal 2010). Early adoption of these statements is prohibited. The Company believes the adoption of these statements will have a material impact on significant acquisitions completed after September 1, 2009.   See Note 9 which reflects the accounting treatment of our 2009 Merger utilizing these provisions.

In March 2008, the FASB issued ASC Topic 815, Derivatives and Hedging, (“ASC 815”) (previously SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities). This statement will require enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company adopted ASC 815 on December 1, 2008 and has determined that ASC 815 had no material impact on its financial results for the three months ended November 30, 2009.

In May 2008, the FASB released ASC Topic 470, Debt, (“ASC 470”) (previously FASB Staff Position (“FSP”) APB 14-1 Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) that alters the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. ASC 470 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Furthermore, it would require recognizing interest expense in prior periods pursuant to retrospective accounting treatment. FSP ASC 470 is effective for financial statements issued for fiscal years beginning after December 15, 2008; therefore, the Company adopted ASC 470 as of September 1, 2009. The Company has determined that ASC 470 had no material impact on its condensed consolidated financial statements for the three months ended November 30, 2009.
 
 
In June 2008, the FASB issued FASB ASC Topic 815, Derivatives and Hedging, (“ASC 815”) (previously EITF 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock).  ASC 815 requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), and should be classified as a liability and marked-to-market. The statement is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings. The Company adopted ASC 815 as of September 1, 2009 and has determined that ASC 815 had no material impact on its condensed consolidated financial statements for the three months ended November 30, 2009.

In April 2008, the FASB issued ASC Topic 350, Intangibles – Goodwill and Other, (“ASC 350”) (previously FSP SFAS No. 142-3, Determination of the Useful Life of Intangible Assets). ASC 350 provides guidance with respect to estimating the useful lives of recognized intangible assets acquired on or after the effective date and requires additional disclosure related to the renewal or extension of the terms of recognized intangible assets. ASC 350 is effective for fiscal years and interim periods beginning after December 15, 2008. The Company adopted ASC 350 as of September 1, 2009 and has determined that ASC 350 had no material impact on the Company’s condensed consolidated financial statements for the three months ended November 30, 2009.










-11-

 
 
 

 
 


RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In May 2009, the FASB issued ASC Topic 855, Subsequent Events, (“ASC 855”) (previously SFAS No. 165, Subsequent Events). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 defines the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, and the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. ASC 855 is effective for fiscal years and interim periods ending after June 15, 2009. The Company adopted ASC 855 as of August 31, 2009 and anticipates that the adoption will impact the accounting and disclosure of future transactions. The Company’s management has evaluated and disclosed subsequent events from the balance sheet date of November 30, 2009 through January 13, 2010, the day before the date that these condensed consolidated financial statements were included in the Company’s Quarterly Report on Form 10-Q and filed with the SEC.

ASC Topic 825, Financial Instruments, (“ASC 825”) (previously FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments), to require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This ASC 825 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The adoption of ASC 825 did not have a material impact on the Company’s condensed consolidated financial statements for the three months ended November 30, 2009.
 
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (“SFAS 167”), which has not yet been codified in the ASC. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. This statement is effective for fiscal years beginning after November 15, 2009, and for interim periods within that first annual reporting period. The Company is currently evaluating the impact of this standard, however, it does not expect SFAS 167 will have a material impact on its condensed consolidated financial statements.

In June 2009, the FASB issued ASC Topic 105, Generally Accepted Accounting Standards, (“ASC 105”) (previously SFAS No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162), (the “Codification”). The Codification, which was launched on July 1, 2009, became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), EITF and related literature. The Codification eliminates the GAAP hierarchy contained in ASC 105 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC 105 as of September 1, 2009 however, references to both current GAAP and the Codification are included in this filing. The Company has determined that this provision had no material impact on its condensed consolidated financial statements for the three months ended November 30, 2009.
 
(3) INTANGIBLE ASSETS AND GOODWILL>

On January 27, 2006, BioMarin Pharmaceutical Inc. (“BioMarin”) assigned the intellectual property and other rights relating to the RAP technology to the Company. As consideration for the assignment of the RAP technology, BioMarin will receive milestone payments based on certain financing and regulatory triggering events. No other consideration was paid for this assignment. The Company has recorded $150,000 of intangible assets on the consolidated balance sheets as of November 30, 2009 and August 31, 2009 based on the estimated fair value of its agreement with BioMarin.

On December 14, 2007, the Company acquired the intellectual property and other rights to develop DR Cysteamine to treat various indications from the University of California at San Diego (“UCSD”) by way of a merger with Encode Pharmaceuticals, Inc. (“Encode”), a privately held research and development company, which held the intellectual property license with UCSD.

Intangible assets recorded as a result of the 2009 merger were approximately $1.1 million as discussed in Note 9 below.






-12-

 
 
 

 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The intangible assets, recorded at approximately $2.6 million acquired in the merger with Encode, were primarily based on the value of the Company’s common stock and warrants issued to the Encode stockholders:

Intangible asset (IP license) related to the Encode merger, gross
 
$
2,620,000
 
Intangible asset related to NeuroTransTM purchase from BioMarin, gross
 
 
150,000
 
Intangible assets (out-license) related to the 2009 Merger, gross
   
240,000
 
In-process research and development (IP license) related to the 2009 Merger, gross
 
900,000
 
Total gross intangible assets
 
 
3,910,000
 
Less accumulated amortization
 
 
(282,333
)
 
 
 
 
Intangible assets, net
 
$
3,627,667
 
 
 
 
 
 
 
The intangible assets related to DR Cysteamine and NeuroTransTM are being amortized monthly over 20 years, which are the life of the intellectual property patents and the estimated useful life. The 20 year estimated useful life is also based upon the typical development, approval, marketing and life cycle management timelines of pharmaceutical drug products. The intangible assets related to the out-license will be amortized using the straight-line method over the estimated useful life of 16 years, which is the life of the intellectual property patents.The intangible assets related to NGX 426 will not be amortized until the product is developed.  During the three months ended November 30, 2009 and 2008 and the cumulative period from September 8, 2005 (inception) to November 30, 2009, the Company amortized $37,124, $34,624, and $282,332, respectively, of intangible assets to research and development expense.

The following table summarizes the actual and estimated amortization expense for our intangible assets for the periods indicated:

 
 
 
 
 
Amortization period
 
Amortization expense
 
September 8, 2005 (inception) to August 31, 2006 – actual
 
$
4,375
 
Fiscal year ending August 31, 2007 – actual
 
 
7,500
 
Fiscal year ending August 31, 2008 – actual
 
 
94,833
 
Fiscal year ending August 31, 2009 – actual
 
 
138,500
 
Fiscal year ending August 31, 2010 – estimate
 
 
141,000
 
Fiscal year ending August 31, 2011 – estimate
 
 
153,500
 
Fiscal year ending August 31, 2012 – estimate
 
 
153,500
 
Fiscal year ending August 31, 2013 – estimate
 
 
153,500
 
Fiscal year ending August 31, 2014 – estimate
 
 
153,500
 
Fiscal year ending August 31, 2015 – estimate
 
 
153,500
 
 
 
 
 
















-13-

 
 
 

 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(4) FIXED ASSETS>
 

Fixed assets consisted of:
 
 
 
 
 
 
 
 
 
 
 
 
 
Category
 
 
November 30, 2009
 
 
 
August 31, 2009
 
 
Estimated useful lives
Leasehold improvements
 
$
113,422
 
 
$
113,422
 
 
Shorter of life of asset or lease term
Office furniture
 
 
3,188
 
 
 
3,188
 
 
7 years
Laboratory equipment
 
 
277,303
 
 
 
277,303
 
 
5 years
Computer hardware and software
 
 
83,740
 
 
 
80,437
 
 
 
3 years
 
Capital lease equipment
 
 
14,006
 
 
 
14,006
 
 
Shorter of life of asset or lease term
 
 
 
 
 
 
 
 
 
 
 
Total at cost
 
 
491,659
 
 
 
488,356
 
 
 
 
 
Less: accumulated depreciation
 
 
(360,791
)
 
 
(343,621
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total fixed assets, net
 
$
130,868
 
 
$
144,735
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation expense for the three months ended November 30, 2009 and 2008 and the cumulative period from September 8, 2005 (inception) to November 30, 2009 was $17,169, $21,996 and $368,109, respectively. Accumulated depreciation on capital lease equipment was $5,028 and $3,951 as of  November 30, 2009 and August 31, 2009, respectively.
 
(5) FAIR VALUE MEASUREMENT>

The Company uses a fair-value approach to value certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company uses a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 
Level one — Quoted market prices in active markets for identical assets or liabilities;
 
 
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
 
 
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. Assets and liabilities measured at fair value on a recurring basis at November 30, 2009 and August 31, 2009 are summarized as follows:

 
Assets
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
November 30, 2009
Fair value of cash equivalents
 
$1,027,231
 
$                —
 
$             —
 
 
$1,027,231
 
 
 
 
 
 
 
 
 
 
Total
 
$1,027,231
 
$                —
 
$             —
 
 
$1,027,231


 
 



 
 
-14-

 
 
 

 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 
Assets
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
August 31, 2009
Fair value of cash equivalents
 
$ 3,515,353
 
$                —
 
$             —
 
 
$  3,515,353
 
 
 
 
 
 
 
 
 
 
Total
 
$ 3,515,353
 
$                —
 
$             —
 
 
$  3,513,353

Cash equivalents represent the fair value of our investment in two money market accounts as of November 30, 2009 and August 31, 2009
 
(6) ACCRUED LIABILITIES>
 

Accrued liabilities consisted of:
 
 
 
 
 
 
 
 
 
 
 
November 30, 2009
 
 
August 31, 2009
 
Salaries and benefits and other obligations related to 2009 Merger
 
$
429,457
   
$
 
Legal fees primarily due to 2009 Merger
 
 
227,731
 
 
 
195,552
 
Accrued vacation
 
 
52,786
 
 
 
38,109
 
Patent costs
 
 
39,551
 
 
 
10,500
 
Salaries and wages
 
 
34,397
 
 
 
57,351
 
Auditing and tax preparation fees
 
 
33,710
 
 
 
19,720
 
Consulting — research and development
 
 
26,650
 
 
 
21,000
 
2009 Merger joint proxy/prospectus
 
 
 
 
 
109,011
 
Total accrued liabilities
 
$
844,282
 
 
$
451,243
 
 
 
 
 
 
 
 


On October 17, 2007, the Company purchased certain assets of Convivia, Inc. (“Convivia”) including intellectual property, know-how and research reports related to a product candidate targeting liver aldehyde dehydrogenase (“ALDH2”) deficiency, a genetic metabolic disorder. The Company issued an aggregate of 101,991 shares of its restricted, unregistered common stock to the seller and other third parties in settlement of the asset purchase. Pursuant to ASC Topic 730, Research and Development, (previously Financial Accounting Standard (“FAS”) 2 Paragraph 11(c), Intangibles Purchased From Others), the Company has expensed the value of the common stock issued in connection with this asset purchase as in-process research and development expense. The amount expensed was based upon the closing price of Raptor’s common stock on the date of the closing of the asset purchase transaction of $2.359 per share multiplied by the aggregate number of shares of Raptor common stock issued or 101,991 for a total expense of $240,625 recorded on Raptor’s consolidated statement of operations during the year ended August 31, 2008.

(8) STOCK OPTION PLAN>

Effective September 1, 2006, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with ASC 718, as interpreted by ASC 718. Prior to September 1, 2006, the Company accounted for stock options according to the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value. The Company adopted the modified prospective transition method provided for under ASC 718, and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock options now includes: (1) quarterly amortization related to the remaining unvested portion of all stock option awards granted prior to September 1, 2006, based on the grant date value estimated in accordance with the original provisions of ASC 718; and (2) quarterly amortization related to all stock option





-15-

 
 
 

 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

awards granted subsequent to September 1, 2006, based on the grant date fair value estimated in accordance with the provisions of ASC 718. In addition, the Company records consulting expense over the vesting period of stock options granted to consultants. The compensation expense for stock-based compensation awards includes an estimate for forfeitures and is recognized over the requisite service period of the options, which is typically the period over which the options vest, using the straight-line method. Employee stock-based compensation expense for the three months ended November 30, 2009 and 2008 and for the cumulative period from September 8, 2005 (inception) to November 30, 2009 was $25,803, $116,518, and $1,240,830 of which cumulatively $1,051,583 was included in general and administrative expense and $189,247 was included in research and development expense. No employee stock compensation costs were recognized for the period from September 8, 2005 (inception) to August 31, 2006, which was prior to the Company’s adoption of ASC 718.

Stock-based compensation expense was based on the Black-Scholes option-pricing model assuming the following:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
           
Expected
           
 
   
Risk-free
   
life of stock
   
Annual
   
Annual
 
Period*
 
interest rate
   
option
   
volatility
   
turnover rate
 
September 8, 2005 (inception) to August 31, 2006**
 
 
5
%
 
10 years
 
 
100
%
 
 
0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended November 30, 2006
 
 
5
%
 
8 years
 
 
100
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended February 28, 2007
 
 
5
%
 
8 years
 
 
100
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended May 31, 2007
 
 
5
%
 
8 years
 
 
100
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended August 31, 2007
 
 
4
%
 
8 years
 
 
100
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended November 30, 2007
 
 
3.75
%
 
8 years
 
 
109
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended February 29, 2008
 
 
2
%
 
8 years
 
 
119
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended May 31, 2008
 
 
2
%
 
8 years
 
 
121
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended August 31, 2008
 
 
2.5
%
 
8 years
 
 
128
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended November 30, 2008
 
 
1.5
%
 
7 years
 
 
170
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended February 28, 2009
 
 
2.0
%
 
7 years
 
 
220
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended May 31, 2009
 
 
2.6
%
 
7 years
 
 
233
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended August 31, 2009
 
 
3.2
%
 
7 years
 
 
240
%
 
 
10
%
                             
Quarter ended November 30, 2009
 
 
3.0
%
 
7 years
 
 
245
%
 
 
10
%
 
 
 
 
 
*
 
Dividend rate is 0% for all period presented.
 
**
 
Stock-based compensation expense was recorded on the consolidated statements of operations commencing on the effective date of ASC 718, September 1, 2006. Prior to September 1, 2006, stock based compensation was reflected only in the footnotes to the consolidated statements of operations, with no effect on the consolidated statements of operations, per the guidelines of APB No. 25. Consultant stock-based compensation expense has been recorded on the consolidated statements of operations since inception.

If factors change and different assumptions are employed in the application of ASC 718, the compensation expense recorded in future periods may differ significantly from what was recorded in the current period.

The Company recognizes as an expense the fair value of options granted to persons who are neither employees nor directors. The fair value of expensed options was based on the Black-Scholes option-pricing model assuming the same factors shown in the stock-based compensation expense table above. Stock-based compensation expense for consultants for the three months ended November 30, 2009 and 2008 and for the cumulative period from September 8, 2005 (inception) to November 30,

-16-

 
 
 

 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2009, were $65,200, $12,993 and $472,813, respectively, of which cumulatively $113,439 was included in general and administrative expense and $359,374 was included in research and development expense.

A summary of the activity in the 2006 Equity Compensation Plan, as amended and the Company’s other stock option plans, is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average
 
 
 
 
 
 
 
Weighted average
 
 
 
Option shares
 
 
exercise price
 
 
 
Exercisable
 
 
fair value of
options granted
 
Outstanding at September 8, 2005
 
 
 
 
 
 
 
 
 
 
 
 
Granted
 
 
580,108
 
 
$
2.64
 
 
 
 
 
$
2.47
 
Exercised
 
 
 
 
 
 
 
 
 
 
 
 
Canceled
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at August 31, 2006
 
 
580,108
 
 
$
2.64
 
 
 
4,010
 
 
$
2.47
 
Granted
 
 
107,452
 
 
$
2.56
 
 
 
 
 
$
2.31
 
Exercised
 
 
(3,381
)
 
$
2.57
 
 
 
 
 
$
2.40
 
Canceled
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at August 31, 2007
 
 
684,179
 
 
$
2.63
 
 
 
273,236
 
 
$
2.45
 
Granted
 
 
223,439
 
 
$
2.27
 
 
 
 
 
$
2.21
 
Exercised
 
 
 
 
 
 
 
 
 
 
 
 
Canceled
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at August 31, 2008
 
 
907,618
 
 
$
2.54
 
 
 
600,837
 
 
$
2.39
 
Granted
 
 
81,595
 
 
$
1.13
 
 
 
 
 
$
1.04
 
Exercised
 
 
 
 
 
 
 
 
 
 
 
 
Canceled
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at August 31, 2009
 
 
989,213
 
 
$
2.42
 
 
 
826,303
 
 
$
2.28
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Granted
 
50,590
 
 
$
3.43
 
 
 
34,959
 
 
$
2.26
 
Assumed in the 2009 Merger
 
161,044
    $
114.12
     
158,475
     
 
Exercised
 
(2,115
)
 
$
2.24
 
 
 
 
 
 
 
Canceled
 
(2,569
)
 
$
819.17
 
 
 
 
 
 
 
Outstanding at November 30, 2009
 
1,196,163
 
 
$
17.26
 
 
 
1,109,737
 
 
$
2.39
 
 
 
The weighted average intrinsic values of stock options outstanding and expected to vest and stock options exercisable as of November 30, 2009 and 2008 were $906,974, $692,785, zero and zero respectively.

There were 1,208,104 options available for grant under the 2006 Equity Compensation Plan, as amended, and under the stock option plans assumed in the 2009 Merger as of November 30, 2009. As of November 30, 2009, the options outstanding consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options outstanding
 
 
 Options exercisable
 
 
 
 
 
 
Weighted
 
 
Weighted
 
 
 
 
 
 
 
 
 
Number of options
 
 
average remaining
 
 
average exercise
 
 
Number of options
 
 
Weighted average
 
 
Range of exercise prices
 
outstanding (#)
 
 
contractual life (yrs.)
 
 
price ($)