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HORIZON PHARMACEUTICAL LLC 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
raptor10q053111.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 endedMay 31, 2011
 
or
[
]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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) (Zip Code)
 
 
(415) 382-8111
(Registrant’s telephone number, including area code)
 
 
 
(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 Web site, 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   [  ]      
 
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.:
 
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 34,595,103 shares of the registrant’s common stock, $.001 par value per share, outstanding at July 5, 2011.

 
 

 
 


RAPTOR PHARMACEUTICAL CORP.

FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2011

Table of Contents
   
Page
Part 1 - Financial Information
Item 1
Financial Statements
 
 
Condensed Consolidated Balance Sheets as of May 31, 2011 (unaudited) and August 31, 2010
2
 
Unaudited Condensed Consolidated Statements of Operations for the three month periods ended May 31, 2011 and 2010
3
 
Unaudited Condensed Consolidated Statements of Operations for the nine month periods ended May 31, 2011 and 2010 and the cumulative period from September 8, 2005 (inception) to May 31, 2011
4
 
Unaudited Condensed Consolidated Statements of Cash Flows for the nine month periods ended May 31, 2011 and 2010 and the cumulative period from September 8, 2005 (inception) to May 31, 2011
5
 
Notes to Condensed Consolidated Financial Statements
6
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3
Quantitative and Qualitative Disclosures About Market Risk
53
Item 4
Controls and Procedures
53
Part II - Other Information
Item 1
Legal Proceedings
53
Item 1A
Risk Factors
54
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
57
Item 3
Defaults Upon Senior Securities
58
Item 4
(Removed and Reserved)
58
Item 5
Other Information
58
Item 6
Exhibits
59
SIGNATURES
61


 
 
 

 
 
 



 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements.

Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Balance Sheets
 
         
May 31, 2011
 
August 31, 2010
ASSETS
 
(unaudited)
 
(1)
Current assets:
             
 
Cash and cash equivalents
 
 $
13,325,695
 
 $
16,953,524
 
Restricted cash
   
114,282
   
-
 
Prepaid expenses and other
   
191,074
   
285,898
Total current assets
   
13,631,051
 
 
17,239,422
                   
Intangible assets, net
   
3,397,417
 
 
3,512,542
Goodwill
     
3,275,403
   
3,275,403
Fixed assets, net
     
65,056
   
93,249
Deposits
     
104,906
   
102,906
Deferred offering costs
     
-
   
166,015
   
Total assets
 
$
20,473,833
 
$
24,389,537
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
           
                   
Liabilities
             
Current liabilities:
             
 
Accounts payable
 
 $
1,144,624
 
 $
637,321
 
Accrued liabilities
   
1,017,312
   
1,129,810
 
Common stock warrant liability
   
32,852,755
   
15,780,216
 
Deferred rent
     
27,029
   
2,673
 
Capital lease liability – current
   
3,106
   
4,865
Total current liabilities
   
35,044,826
   
17,554,885
                   
Capital lease liability - long-term
   
-
   
 1,811
Total liabilities
     
35,044,826
   
17,556,696
                   
 
Commitments and contingencies
           
                   
Stockholders’ equity (deficit):
           
 
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, 33,127,556  and 30,076,758 shares issued and outstanding as at May 31, 2011 and August 31, 2010, respectively
   
33,128
   
30,077
 
Additional paid-in capital
   
59,563,190
   
47,617,449
 
Accumulated other comprehensive loss
   
(395)
   
(7,854)
 
Deficit accumulated during development stage
   
(74,166,916)
   
(40,806,831)
Total stockholders’ equity (deficit)
   
(14,570,993)
   
6,832,841
   
Total liabilities and stockholders’ equity (deficit)
 
 $
20,473,833
 
 $
24,389,537
 
(1) Derived from the Company’s audited consolidated financial statements as of August 31, 2010.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.



-2-

 
 
 
 

 

 
Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
     
For the three month periods from
March 1, 2011 to May 31,
     
2011
 
2010
               
 Revenues:
$
-
 
$
-
               
Operating expenses:
         
       General and administrative
 
1,733,218
   
938,113
       Research and development
 
3,901,651
   
2,176,658
              Total operating expenses
 
5,634,869
   
3,114,771
               
 Loss from operations
 
(5,634,869)
   
(3,114,771)
               
      Interest income
 
12,116
   
5,489
      Interest expense
 
(486)
   
(814)
      Foreign currency transaction loss
 
-
   
-
      Adjustment to fair value of
        common stock warrants
 
(14,641,775)
   
(4,345,251)
             Net loss
$
(20,265,014)
 
$
(7,455,347)
               
Loss per share from operations:
         
       Basic and diluted
$
(0.17)
 
$
(0.14)
           
Net loss per share:
         
       Basic and diluted
$
(0.62)
 
$
(0.33)
               
Weighted average shares
         
      outstanding used to compute:
       
 
         Basic and diluted
 
32,594,450
   
22,842,875
               
The accompanying notes are an integral part of these condensed consolidated financial statements.







-3-
 
 

 
 
 


Raptor Pharmaceutical Corp.
   
(A Development Stage Company)
   
Condensed Consolidated Statements of Operations
   
(Unaudited)
   
                         
     
For the nine month periods from
 
For the cumulative period from September 8, 2005 (inception) to May 31, 2011
   
     
September 1, 2010 to May 31, 2011
 
September 1, 2009 to May 31, 2010
     
                           
 Revenues:
$
-
 
$
-
 
$
-
     
                           
Operating expenses:
                     
       General and administrative
 
4,565,829
   
2,926,960
   
15,242,217
     
       Research and development
 
10,266,027
   
6,271,997
   
34,474,391
     
       In-process research and dev.
 
-
   
-
   
240,625
     
              Total operating expenses
 
14,831,856
   
9,198,957
   
49,957,233
     
                           
 Loss from operations
 
(14,831,856)
   
(9,198,957)
   
(49,957,233)
     
                           
      Interest income
 
31,348
   
15,897
   
358,952
     
      Interest expense
 
(1,484)
   
(2,649)
   
(115,371)
     
      Foreign currency transaction gain (loss)
 
89
   
-
   
(368)
     
      Adjustment to fair value of
        common stock warrants
 
(18,558,182)
   
(5,388,641)
   
(24,452,896)
     
             Net loss
$
(33,360,085)
 
$
(14,574,350)
 
$
(74,166,916)
     
                           
Loss per share from operations:
                     
       Basic and diluted
$
(0.47)
 
$
(0.44)
           
                       
Net loss per share:
                     
       Basic and diluted
$
(1.06)
 
$
(0.69)
           
                           
Weighted average shares
                     
      outstanding used to compute:
                     
         Basic and diluted
 
31,536,829
   
20,999,659
           
                           
                       
The accompanying notes are an integral part of these condensed consolidated financial statements.
       







-4-
 
 

 



Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
       
 
For the nine month periods from
 
For the cumulative period from September 8, 2005
September 1, 2010 to May 31, 2011
 
September 1, 2009 to May 31, 2010
 (inception)
to May 31, 2011
Cash flows from operating activities:
                 
 
Net loss
 
$
(33,360,085)
 
$
(14,574,350)
 
$
(74,166,917)
 
Adjustments to reconcile net loss to net cash used in operating activities:
                 
 
Employee stock-based compensation expense
   
1,541,888
   
140,857
   
2,973,646
 
Consultant stock-based compensation expense
   
38,016
   
75,405
   
523,957
 
Fair value adjustment of common stock warrants
   
18,558,182
   
5,388,641
   
24,452,896
 
Amortization of intangible assets
   
115,125
   
113,875
   
512,583
 
Depreciation of fixed assets
   
58,182
   
55,026
   
481,363
 
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
   
94,824
   
75,933
   
(91,636)
   
Intangible assets
   
-
   
-
   
(150,000)
   
Deposits
   
(2,000)
   
(2,700)
   
(104,907)
   
Accounts payable
   
507,303
   
 191,699
   
1,144,624
   
Accrued liabilities
   
(112,498)
   
(816,996)
   
336,586
   
Deferred rent
   
24,356
   
 1,081
   
26,924
   
Net cash used in operating activities
   
(12,536,707)
   
(9,351,529)
   
(43,680,256)
 
Cash flows from investing activities:
                 
   
Purchase of fixed assets
   
(29,989)
   
 (14,400)
   
(527,095)
   
Cash acquired in 2009 Merger
   
-
   
 581,395
   
581,391
   
Increase in restricted cash
   
(114,282)
   
-
   
(114,282)
   
Net cash provided by (used in) investing activities
   
(144,271)
   
 566,995
   
(59,986)
 
Cash flows from financing activities:
                 
   
Proceeds from the sale of common stock
   
-
   
7,495,116
   
39,941,278
   
Proceeds from the sale of common stock under an equity line
   
6,747,778
   
2,399,976
   
11,647,729
   
Proceeds from the exercise of common stock warrants
   
2,300,838
   
56,018
   
9,285,357
   
Proceeds from the exercise of common stock options
   
8,828
   
50,060
   
81,549
   
Fundraising costs
   
(8,182)
   
(1,430,488)
   
(4,183,362)
   
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
   
(3,572)
   
(3,022)
   
(16,219)
 
Net cash provided by financing activities
   
9,045,690
   
8,567,660
   
57,066,332
 
Foreign currency translation gain (loss)
   
7,459
   
-
   
(395)
 
Net increase (decrease) in cash and cash equivalents
   
(3,627,829)
   
(216,874)
   
13,325,695
 
Cash and cash equivalents, beginning of period
   
16,953,524
   
 3,701,787
   
-
 
Cash and cash equivalents, end of period
 
$
13,325,695
 
$
 3,484,913
 
$
13,325,695
Supplemental disclosure of non-cash financing activities:
                 
   
Warrants issued in connection with financing
 
$
-
 
$
1,916,011
 
$
16,310,414
   
Common stock and warrants issued in connection with reverse merger
 
$
-
 
$
4,417,046
 
$
4,417,046
   
Common stock issued as fee for equity line
 
$
352,500
 
$
363,331
 
$
827,637
   
Fair value of warrant liability reclassified to equity upon exercise
 
$
1,485,643
 
$
-
 
$
1,485,643
   
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
   
Amortization of direct offering costs
 
$
-
 
$
-
 
$
156,400
The accompanying notes are an integral part of these condensed consolidated 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. and its wholly-owned subsidiaries (the “Company” or “Raptor”) and have been prepared in accordance with the accounting principles generally accepted in the United States of America.   The Company’s fiscal year end is August 31.
 
  On July 28, 2009, the Company and ECP Acquisition, Inc., a Delaware corporation, the Company’s then-wholly-owned subsidiary (“merger sub”), entered into an Agreement and Plan of Merger and Reorganization (the “2009 Merger Agreement”), with Raptor Pharmaceuticals Corp., a Delaware corporation (“RPC”). 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 (the “2009 Merger”), merger sub was merged with and into RPC and RPC survived the 2009 Merger as a wholly-owned subsidiary of the Company. Immediately prior to the 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 RPC’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 the Company’s common stock, on a post 1-for-17 reverse-split basis. Each option and warrant to purchase RPC’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, RPC’s stockholders (as of immediately prior to the 2009 Merger) owned approximately 95% of the Company’s outstanding common stock and the Company’s stockholders (as of immediately prior to the 2009 Merger) owned approximately 5% of the Company’s outstanding common stock.
 
RPC, 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 RPC 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 RPC 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 (jurisdiction of incorporation):
 
Raptor Pharmaceutical Corp., formerly TorreyPines Therapeutics, 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.)
(merged with TPTX, Inc. on August 30, 2010)
|
Raptor Pharmaceuticals Europe B.V. (Netherlands)

-6-

 
 

 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 clinical 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 ConviviaTM for the potential treatment of aldehyde dehydrogenase (“ALDH2”) deficiency, a clinical stage product candidate for which it has out-licensed to a Taiwanese firm and continues to seek additional Asian out-licenses or to form a development partnership franchise in Asia where ALDH2 deficiency is prevalent.  The Company is also developing tezampanel in a planned Phase 1 study for the potential treatment of thrombotic disorder.
 
Raptor’s preclinical division bioengineers novel drug candidates and drug-targeting platforms derived from the human receptor-associated protein (“RAP”) and related proteins.  Raptor’s preclinical programs target cancer, neurodegenerative disorders and infectious diseases. The HepTide™ program is designed to utilize engineered RAP-based peptides conjugated to drugs to target delivery to the liver to potentially treat primary liver cancer and other liver diseases. NeuroTrans™ represents engineered RAP peptides created to target receptors in the brain and is 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.
 
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 the proprietary technology of others; dependence on key personnel; uncertain patent protection; and dependence on corporate partners and collaborators.  See the section titled “Risk Factors that may Affect Future Results” included elsewhere in 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 direct and indirect wholly owned subsidiaries, Raptor Pharmaceuticals Corp., Raptor Discoveries Inc., and Raptor Therapeutics Inc., such subsidiaries incorporated in Delaware on May 5, 2006, September 8, 2005 (date of inception), and August 1, 2007, respectively, and Raptor Pharmaceuticals Europe B.V. incorporated in the Netherlands on December 15, 2009. 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 May 31, 2011, the Company had accumulated losses of approximately $74.2 million. Management expects to incur further losses for the foreseeable future. Management believes that the Company’s cash and cash equivalents as of June 30, 2011 of approximately $15.7 million will be sufficient to meet the Company’s obligations into January 2012.  The Company plans to raise equity funds by end of the third calendar quarter of 2011 and continues to review strategic partnerships and collaborations as a potential means to fund its preclinical and clinical programs beyond January 2012. 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. The Company 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 condensed consolidated financial statements do not include any adjustments that might result from the failure to continue as a going concern.                                                                                                                                         -7-
 

 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
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 the Company’s consolidated financial statements for the years ended August 31, 2010 and 2009. The November 22, 2010 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.
 
 (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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
(c) Functional Currency
 
The Company’s consolidated functional currency is the U.S. dollar.  Raptor Pharmaceuticals Europe B.V., (the “BV”), the Company’s European subsidiary, records its functional currency as the European Euro.  At quarter-end the BV’s balance sheet is translated into U.S. dollars based upon the quarter-end exchange rate, while its statement of operations is translated into U.S. dollars based upon an average of the Euro’s value between the beginning and end date of the reporting period.  The BV’s equity is adjusted for any translation gain or loss.
 
(d)  Fair Value of Financial Instruments
 
The carrying amounts of certain of the Company’s financial instruments including cash and cash equivalents, restricted cash, prepaid expenses, accounts payable, accrued liabilities and capital lease liability approximate fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these condensed consolidated financial statements.  The warrant liability is carried at fair value which is determined using the Black-Scholes option valuation model at the end of each reporting period.
 
(e) 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 months ended May 31,
 
   
2011
   
2010
 
   
Preclinical
   
Clinical
   
Total
   
Preclinical
   
Clinical
   
Total
 
Net loss
 
$
(2,938,749)
   
$
(17,326,265)
   
$
(20,265,014)
   
$
(1,873,835)
   
$
(5,581,512)
   
$
(7,455,347)
 
Total assets
   
3,588,228
     
16,885,605
     
20,473,833
     
2,689,609
     
8,167,950
     
10,857,559
 





-8-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   
For the nine months ended May 31,
 
   
2011
   
2010
 
   
Preclinical
   
Clinical
   
Total
   
Preclinical
   
Clinical
   
Total
 
Net loss
 
$
(5,895,442)
   
$
(27,464,643)
   
$
(33,360,085)
   
$
(3,902,752)
   
$
(10,671,598)
   
$
(14,574,350)
 
Total assets
   
3,588,228
     
16,885,605
     
20,473,833
     
2,689,609
     
8,167,950
     
10,857,559
 

(f) Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents.  The Company maintains cash and cash equivalents, which consist principally of money market funds with high credit quality financial institutions.  Such amounts exceed Federal Deposit Insurance Corporation insurance limits.  The Company has not experienced any losses on these investments.  Restricted cash represents compensating balances required by our U.S. and European banks as collateral for credit cards.

(g) Intangible Assets
 
Intangible assets include the intellectual property and other rights relating to DR Cysteamine, to the RAP technology, to an out-license acquired in the 2009 Merger and the rights to tezampanel and NGX 426 (oral tezampanel) also acquired in the 2009 Merger (tezampanel and oral tezampanel are referred to as tezampanel hereafter). 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 tezampanel, which has been classified as in-process research and development, will not be amortized until development is completed, but will be tested annually for impairment.
 

(h) Goodwill
 
Goodwill represents the excess of the value of the purchase consideration over the identifiable assets acquired in the 2009 Merger.  Goodwill is reviewed annually, or when an indication of impairment exists, to determine if any impairment analysis and resulting write-down in valuation is necessary.
 
(i) 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 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.
 
(j) 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.
 
(k) Common Stock Warrant Liabilities
 
The warrants issued by the Company in the 2010 private placement contain a cash-out provision which may be triggered upon request by the warrant holders if the Company is acquired or upon the occurrence of certain other fundamental transactions involving the Company.  This provision requires these warrants to be classified as liabilities and to be marked to market at each period-end commencing on August 31, 2010. The warrants issued by the Company in its December 2009 equity
-9-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
financing contain a conditional obligation that may require the Company to transfer assets to repurchase the warrants upon the occurrence of potential future events.  Under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity (“ASC 480”), a financial instrument that may require the issuer to settle the obligation by transferring assets is classified as a liability.  Therefore, the Company has classified the warrants as liabilities and will mark them to fair value at each period-end.  The common stock warrants are re-measured at the end of every reporting period with the change in value reported in the Company’s condensed consolidated statements of operations.  Warrants which are recorded as liabilities that are exercised are re-measured and marked to market the day prior to exercise and such value is recorded as adjustment to fair value of common stock warrants with an offset to additional paid in capital.
 
(l) 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.
 
(m) Research and Development
 
The Company is a development stage biotechnology company. Research and development costs are charged to expense as incurred. Research and development expenses include medical, clinical, regulatory and scientists’ salaries and benefits, 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.  Research and development expenses are offset by contra-expenses which are reimbursements of research and development expenses received either from research collaborators or from government grants or tax rebates.
 
(n) 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 product’s useful life. The Company reviews each product candidate acquisition to determine the existence of in-process research and development.
 
(o) 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:
 
   
May 31,
 
   
2011
   
2010
 
Warrants to purchase common stock
 
9,425,017
   
5,543,738
 
Options to purchase common stock
 
3,589,940
   
1,390,353
 
Total potentially dilutive securities
 
13,014,957
   
6,934,091
 
 
(p) Stock Option Plan
 
Effective September 1, 2006, the Company adopted the provisions of FASB ASC Topic 718, Accounting for Compensation Arrangements, (“ASC 718”) (previously listed as Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment) in accounting for its stock option plans. 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
-10-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Plans, for further discussion of employee stock-based compensation.
 
(q) Recent Accounting Pronouncements
 
In December 2010, the FASB issued ASU 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”).  ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires the company to perform Step 2 if it is more likely than not that a goodwill impairment may exist.  ASU 2010-28 is effective for fiscal years and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company will adopt these standards on September 1, 2011 and is currently assessing the impact on its condensed consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 is intended to result in convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying U.S. GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt these standards on March 1, 2012 and is currently assessing the impact on its condensed consolidated financial statements.

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt these standards on September 1, 2012.  Because ASU 2011-05 impacts presentation only, it will have no effect on the Company's condensed consolidated financial statements or on its financial condition.


(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 condensed consolidated balance sheets as of May 31, 2011 and August 31, 2010 based on the estimated fair value of its agreement with BioMarin.






-11-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
On December 14, 2007, the Company acquired the intellectual property and other rights to develop DR Cysteamine to treat various clinical indications from the University of California at San Diego (“UCSD”) by way of a merger with Encode Pharmaceuticals, Inc., a privately held development stage company (“Encode”), which held the intellectual property license with UCSD. The intangible assets acquired in the merger with Encode were recorded at approximately $2.6 million, primarily based on the value of the Company’s common stock and warrants issued to the Encode stockholders.
 
Intangible assets recorded as a result of the 2009 Merger were approximately $1.1 million as discussed in Note 9 below.
 
Summary of intangibles acquired as discussed above:
 
Intangible asset (IP license) related to the Encode merger
 
$
2,620,000
 
Intangible asset related to NeuroTransTM purchase from BioMarin
   
150,000
 
Intangible assets (out-license) related to the 2009 Merger
   
240,000
 
In-process research and development (IP license) related to the 2009 Merger
 
900,000
 
Total intangible assets
   
3,910,000
 
Less accumulated amortization
   
(512,583)
 
Intangible assets, net
 
$
3,397,417
 

 
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 tezampanel, which has been classified as in-process research and development, will not be amortized until the product is developed.  During the three and nine months ended May 31, 2011 and 2010 and the cumulative period from September 8, 2005 (inception) to May 31, 2011, the Company amortized $18,741, $58,182, $38,375, $113,875, and $512,583, respectively, of intangible assets to research and development expense.
 
The following table summarizes the actual and estimated amortization expense for intangible assets for the periods indicated:
 
Amortization period
 
Amortization expense
 
September 8, 2005 (inception) to August 31, 2006 – actual
 
$
4,375
 
Fiscal year ended August 31, 2007 – actual
   
7,500
 
Fiscal year ended August 31, 2008 – actual
   
94,833
 
Fiscal year ended August 31, 2009 – actual
   
138,500
 
Fiscal year ended August 31, 2010 – actual
   
152,250
 
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
 

 
Goodwill of $3,275,404 represents the excess of total consideration recorded for the 2009 Merger over the value of the assets assumed.  In October 2010, the Company reviewed the carrying value of goodwill for impairment as of its fiscal year ended August 31, 2010 and determined that there was no impairment.   For the three and nine months ended May 31, 2011, there were no indications of impairment of goodwill.  Intangibles are tested for impairment whenever events indicate that their carrying values may not be recoverable.  There were no indications of impairment of intangible assets during the three and nine months ended May 31, 2011.
 

 

 
-12-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
(4) FIXED ASSETS
 
Fixed assets consisted of:
 
Category
 
May 31, 2011
   
August 31, 2010
   
Estimated useful lives
Leasehold improvements
 
$
124,763
   
$
119,773
   
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
   
119,841
     
94,842
     
3 years
 
Capital lease equipment
   
14,006
     
14,006
   
Shorter of life of asset or lease term
Total at cost
   
539,101
     
509,112
         
Less: accumulated depreciation
   
(474,045)
     
(415,863)
         
Total fixed assets, net
 
$
65,056
   
$
93,249
         

Depreciation expense for the three and nine months ended May 31, 2011 and 2010 and the cumulative period from September 8, 2005 (inception) to May 31, 2011 was $18,742, $58,182, $19,041, $55,026 and $481,363, respectively. Accumulated depreciation on capital lease equipment was $11,492 and $3,951 as of May 31, 2011, and August 31, 2010, 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 May 31, 2011 and August 31, 2010 are summarized as follows:
 
Assets
 
 
Level 1
 
 
Level 2
 
 
Level 3
   
 
May 31, 2011
Fair value of cash equivalents
 
$11,388,325
 
$                   —
 
$             —
   
$11,388,325
Restricted cash
 
 
114,282
 
   
114,282
Total
 
$11,388,325
 
$          114,282
 
$             —
   
$11,502,607
                     
Liabilities
                   
Fair value of common stock warrants
 
 
$             —
 
 
$                —
 
 
$32,852,755
   
$32,852,755
 
Total
 
$             —
 
$                —
 
$32,852,755
   
$32,852,755
 

 
 
Assets
 
 
Level 1
 
 
Level 2
 
 
Level 3
   
 
August 31, 2010
Fair value of cash equivalents
 
$16,509,186
 
$                —
 
$             —
   
$16,509,186
Total
 
$16,509,186
 
$                —
 
$             —
   
$16,509,186
                   

-13-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liabilities
                 
 
Fair value of common stock warrants
 
 
$             —
 
 
$                —
 
 
$15,780,216
   
 
$15,780,216
Total
 
$             —
 
$                —
 
$15,780,216
   
$15,780,216

Cash equivalents represent the fair value of the Company’s investment in four and two money market accounts as of May 31, 2011, and August 31, 2010, respectively.
 
Marked-to-Market
 
The common stock warrants issued in the Company’s August 2010 private placement and the Company’s December 2009 equity financing are classified as liabilities under ASC 480 and are, therefore, re-measured using the Black-Scholes option valuation model at the end of every reporting period with the change in value reported in the Company’s condensed consolidated statements of operations.
 
For the three and nine months ended May 31, 2011 and 2010, as a result of the marking-to-market of the warrant liability at quarter-end and the day prior to the exercise of warrants subject to warrant liability accounting, the Company recorded a losses of $14.6 million, $18.6 million, $4.3 million and $5.4 million, respectively, in the line item adjustment to fair value of common stock warrants in its condensed consolidated statement of operations.  See Note 10 for further discussion on the calculation of the fair value of the warrant liability.
 
   
Warrant
liability
in millions
Fair value of December 2009 direct offering warrants (including broker warrants) at fiscal year ended August 31, 2010
$
  5.8
        Adjustment to mark to market common stock warrants at quarter ended November 30, 2010
 
2.3
        Adjustment to mark to market common stock warrants at quarter ended February 28, 2011
 
(1.0)
        Adjustment to mark to market common stock warrants at quarter ended May 31, 2011
 
4.4
December 2009 direct offering common stock warrant liability at fair value on May 31, 2011
 
11.5
Fair value of August 2010 private placement warrants (including broker warrants) at fiscal year ended August 31, 2010
 
9.9
         Adjustment to mark to market common stock warrants at quarter ended November 30, 2010
 
3.5
         Adjustment to mark to market common stock warrants at quarter ended February 28, 2011
 
(0.8)
         Adjustment to mark to market common stock warrants at quarter ended May 31, 2011
 
8.8
August 2010 private placement common stock warrant liability at fair value on May 31, 2011
 
21.4
Total warrant liability at May 31, 2011
$
32.9

(6) ACCRUED LIABILITIES

Accrued liabilities consisted of:

   
May 31, 2011
   
August 31, 2010
 
Clinical trial costs
 
 $
604,493
   
$
280,918
 
Accrued vacation and employee benefits
   
117,935
     
79,077
 
Consulting - general and administrative
   
89,846
     
19,304
 
Salaries and wages
   
67,487
     
88,024
 
Patent costs
   
64,061
     
8,956
 
Clinical trial materials
   
28,151
     
50,000
 
Legal fees
   
26,135
     
182,890
 
Auditing and tax preparation fees
   
19,204
     
33,245
 
Clinical milestone payment due to UCSD
   
-
     
200,000
 
Accrued bonuses
   
-
     
184,021
 
Other
   
-
     
3,375
 
Total accrued liabilities
 
$
1,017,312
   
$
1,129,810
 
-14-

 
 
 
 

 
 
 

 RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
(7) COMPREHENSIVE LOSS
 
The following table shows the computation of total comprehensive loss:
 
 
 
Three months ended May 31,
   
 
Nine months ended May 31,
 
2011
 
2010
   
2011
 
2010
Net loss
$(20,265,014)
 
$(7,455,347)
   
$(33,360,085)
 
$(14,574,350)
Foreign currency translation adjustments
1,910
 
-
   
7,459
 
-
Total comprehensive loss
$(20,263,104)
 
$(7,455,347)
   
$(33,352,626)
 
$(14,574,350)

 
Other comprehensive loss includes gains (losses) on the translation of foreign currency denominated financial statements.  Adjustments resulting from these translations are accumulated and reported as a component of other comprehensive income in the stockholders equity section of the balance sheet.
 

 
 (8) STOCK OPTION PLANS
 
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. 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: (i) 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 (ii) quarterly amortization related to all stock option 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 and nine months ended May 31, 2011 and 2010 and for the cumulative period from September 8, 2005 (inception) to May 31, 2011 was $362,327, $1,541,888, $87,852, $140,857 and $2,973,646, respectively, of which cumulatively $2,394,969 was included in general and administrative expense and $578,677 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.
 















-15-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
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
%
 
Quarter ended February 28, 2010
   
3.1
%
 
7 years
   
55
%
   
10
%
 
Quarter ended May 31, 2010
   
3.1
%
 
7 years
   
77
%
   
2.5
%
 
Quarter ended August 31, 2010
   
2.07
%
 
6 years
   
85
%
   
2.5
%
 
Quarter ended November 30, 2010
   
1.64
%
 
6 years
   
88
%
   
2.5
%
 
Quarter ended February 28, 2011
   
2.42
%
 
6 years
   
90
%
   
2.5
%
 
Quarter ended May 31, 2011
   
2.38
%
 
6 years
   
96
%
   
2.5
%
 
 
*
 
 
Dividend rate is 0% for all periods presented.
**
 
Stock-based compensation expense was recorded on the condensed 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 condensed consolidated statements of operations, with no effect on the condensed consolidated statements of operations, per the guidelines of APB Opinion No. 25. Consultant stock-based compensation expense has been recorded on the condensed 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.
 
During the three months ended May 31, 2010, the Company changed its volatility calculation to reflect its historical trading commencing on September 30, 2009, which is the date that the 2009 Merger was consummated and the Company’s common stock started trading on NASDAQ.  The Company originally estimated volatility based upon historical volatility commencing in June 2006, when it first began trading on the Over-the-Counter Bulletin Board.  The Company changed the volatility assumptions to better reflect its anticipated trading on NASDAQ.  During the three months ended May 31, 2010, the Company analyzed its actual historical turnover rate and concluded that 2.5% was a more accurate estimate of future turnover rate on an annual basis.
 
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 and nine months ended May 31, 2011 and 2010 and for the cumulative period from September 8, 2005 (inception) to May 31, 2011 was $1,007, $38,016, $4,721, $75,405 and $523,957, respectively, of which cumulatively $147,295 was included in general and administrative expense and $376,662 was included in research and development expense.
 




-16-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
A summary of the activity in the 2010 Equity Incentive Plan, the 2006 Equity Compensation Plan, as amended, and the Company’s other stock option plans, is as follows:
 
   
 
Option shares
   
 
Weighted- average exercise price
   
 
Exercisable
   
Weighted- average 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
   
$
2.40
 
Granted
 
302,772
   
$
2.29
     
160,605
   
$
1.24
 
Assumed in the 2009 Merger
 
161,044
   
$
114.12
     
158,475
   
$
2.63
 
Exercised
 
(37,881
)
 
$
1.69
     
   
$
1.49
 
Canceled
 
(23,860
)
 
$
142.42
     
   
 $
2.00
 
Outstanding at August 31, 2010
 
1,391,288
   
$
14.25
     
1,089,248
   
$
1.87
 
Granted
 
1,750,680
   
$
3.36
     
335,859
   
$
0.15
 
Exercised
 
     
     
     
 
Canceled
 
(1,102)
   
$
1,292.00
     
     
 
Outstanding at November 30, 2010
 
3,140,866
   
$
7.73
     
1,424,005
   
$
2.11
 
Granted
 
130,000
   
$
3.54
     
10,000
   
$
2.66
 
Exercised
 
(3,835)
   
$
2.30
     
     
 
Canceled
 
(1,724)
   
$
1,075.76
     
     
 
Outstanding at February 28, 2011
 
3,265,307
   
$
7.01
     
1,537,971
   
$
2.02
 
Granted
 
325,000
   
$
3.33
     
   
$
2.58
 
Exercised
 
-
   
 
     
     
 
Canceled
 
(367)
   
$
614.72
     
     
 
Outstanding at May 31, 2011
 
3,589,940
   
$
6.61
     
1,736,667
   
$
2.08
 

 
The weighted average intrinsic values of stock options outstanding and expected to vest and stock options exercisable as of May 31, 2011 and 2010 were $7,770,104, $4,090,703, $1,255,298 and $854,835, respectively.
 
There were 2,121,064 options available for grant as of May 31, 2011 under the 2010 Equity Incentive Plan (the “Plan”), which was approved by the Company’s Board of Directors as of February 2, 2010 and approved by its stockholders on March 9, 2010. On April 7, 2011, the Company’s stockholders passed amendments to the Plan which allow for a replenishment of the grant pool based upon 5% of the Company’s common stock outstanding as of April 7, 2011, August 31, 2011 and August 31, 2012 up to an aggregate maximum replenishment of 6,000,000 shares.  The April 7, 2011 replenishment added 1,629,516 shares available
 

 
-17-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for grant under the Plan.  The amendments also allow for 50% accelerated vesting of unvested stock options upon a change of control as defined in the Plan, as amended.  No further grants will be made under any previous or assumed stock option plans.  As of May 31, 2011, the options outstanding under all of the Company’s stock option plans consisted of the following:

   
Options outstanding
   
 Options exercisable
 
 
 
 
 Range of exercise prices
 
 
Number of options
outstanding and expected to vest (#)
   
 
 
Weighted- average remaining contractual life (yrs.)
   
 
Weighted- average exercise
price ($)
   
 
 
Number of options exercisable (#)
   
 
Weighted- average exercise price ($)
 
$0 to $1.00
   
34,969
     
7.88
     
.85
     
18,212
     
0.85
 
$1.01 to $2.00
   
85,773
     
8.00
     
1.71
     
58,076
     
1.71
 
$2.01 to $3.00
   
1,590,356
     
7.21
     
2.56
     
1,003,513
     
2.56
 
$3.01 to $4.00
   
1,767,924
     
9.38
     
3.53
     
548,063
     
3.53
 
$4.01 to $5.00
 
62,104
     
7.52
     
4.58
   
59,989
     
4.58
 
$5.01 to $964.24
 
48,814
     
3.90
     
264.16
   
48,814
     
264.16
 
     
3,589,940
     
8.40
     
6.61
     
1,736,667
     
10.44
 

At May 31, 2011, the total unrecognized compensation cost was approximately $4.2 million. The weighted-average period over which it is expected to be recognized is 3 years.
 
(9) ISSUANCE OF COMMON STOCK
 
As of May 31, 2011, there were 33,127,556 shares of the Company’s common stock outstanding.
 
ISSUANCE OF COMMON STOCK PURSUANT TO COMMON STOCK WARRANT EXERCISES AND STOCK OPTION EXERCISES
 
During the three and nine months ended May 31, 2011, the Company received $1,743,882 and $2,300,838, respectively, from the exercise of warrants in exchange for the issuance of 712,238 and 933,858 shares, respectively, of the Company’s common stock, respectively.  During the cumulative period from September 8, 2005 (inception) through May 31, 2011, the Company received approximately $9.2 million from the exercise of warrants in exchange for the issuance of an aggregate of 4,675,616 shares.
 
During the three and nine months ended May 31, 2011, the Company received zero and $8,828, respectively, from the exercise of stock options in exchange for the issuance of zero and 3,835 shares, respectively, of the Company’s common stock.   For the cumulative period from September 8, 2005 (inception) through May 31, 2011, the Company received $81,549 from the exercise of stock options resulting in the issuance of 45,096 shares of common stock.
 
ISSUANCE OF COMMON STOCK PURSUANT TO AN ASSET PURCHASE AGREEMENT WITH CONVIVIA, INC.
 
On October 18, 2007, the Company purchased certain assets of Convivia, including intellectual property, know-how and research reports related to a product candidate targeting liver ALDH2 deficiency, a genetic metabolic disorder. The Company hired Convivia’s chief executive officer and founder, Thomas E. (Ted) Daley, as President of its clinical division. In exchange for the assets related to the ALDH2 deficiency program, the Company issued to Convivia 46,625 shares of its restricted, unregistered common stock, an additional 46,625 shares of its restricted, unregistered common stock to a third party in settlement of a convertible loan between the third party and Convivia, and another 8,742 shares of restricted, unregistered common stock in settlement of other obligations of Convivia. Mr. Daley, as the former sole stockholder of Convivia (now dissolved), may earn additional shares of the Company based on certain triggering events or milestones related to the development of Convivia assets. In addition, Mr. Daley may earn cash bonuses based on the same triggering events pursuant to his employment agreement. In January 2008, Mr. Daley earned a $30,000 cash bonus pursuant to his employment agreement for executing the Patheon formulation agreement for manufacturing ConviviaTM. In March 2008, Mr. Daley earned a $10,000 cash bonus pursuant to his employment agreement and was issued 23,312 shares of common stock valued at $56,000 based on the execution of an agreement to supply the Company with the active pharmaceutical ingredient for ConviviaTM pursuant to the asset purchase agreement.
 
-18-
 

 
 
 
 

 
 
 

 RAPTOR PHARMACEUTICAL CORP.
 
(A Development Stage Company)
 

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
In October 2008, Mr. Daley was issued 23,312 shares of restricted common stock valued at $27,000 and earned a $30,000 cash bonus (pursuant to Mr. Daley’s employment agreement) pursuant to the fulfillment of a clinical milestone. In July 2010, the Company issued 11,656 shares of its restricted common stock valued at $35,551 and paid a $10,000 cash bonus to Mr. Daley as a result of the execution of the license agreement with Uni Pharma for the development of ConviviaTM in Taiwan. Pursuant to ASC 730, the accounting guidelines for expensing research and development costs, the Company has expensed the value of the stock issued in connection with this asset purchase (except for milestone bonuses, which are expensed as compensation expense) as in-process research and development expense in the amount of $240,625 on its consolidated statement of operations for the year ended August 31, 2008.
 
MERGER OF RAPTORS CLINICAL DEVELOPMENT SUBSIDIARY AND ENCODE PHARMACEUTICALS, INC.
 
On December 14, 2007, the Company entered into a Merger Agreement (the “Encode Merger Agreement”), dated as of the same date, by and between the Company, its clinical development subsidiary and Encode. Pursuant to the Encode Merger Agreement, a certificate of merger was filed with the Secretary of State of the State of Delaware and Encode was merged with and into the Company’s clinical development subsidiary. The existence of Encode ceased as of the date of the Encode Merger Agreement. Pursuant to the Encode Merger Agreement and the certificate of merger, the Company’s clinical development subsidiary, as the surviving corporation, continued as a wholly-owned subsidiary of the Company. Under the terms of and subject to the conditions set forth in the Encode Merger Agreement, the Company issued 802,946 shares of restricted, unregistered shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) to the stockholders of Encode (the “Encode Stockholders”), options (“Company Options”) to purchase 83,325 shares of Common Stock to the optionholders of Encode (the “Encode Optionholders”), and warrants (“Company Warrants”) to purchase 256,034 restricted, unregistered shares of Common Stock to the warrantholders of Encode (the “Encode Warrantholders”, and together with the Encode Stockholders and Encode Optionholders, the “Encode Securityholders”), as of the date of the Encode Merger Agreement. Such Common Stock, Company Options to purchase Common Stock, and Company Warrants to purchase Common Stock combine for an aggregate amount of 1,142,305 shares of Common Stock issuable to the Encode Securityholders as of the closing of the merger with Encode. The purchase price was valued at $2.6 million, which is reflected as intangible assets on the Company’s consolidated balance sheet as of August 31, 2008, primarily based on the value of the Company’s common stock and warrants issued to Encode stockholders. The Encode Securityholders are eligible to receive up to an additional 559,496 shares of Common Stock, Company Options and Company Warrants to purchase Common Stock in the aggregate based on certain triggering events related to regulatory approval of DR Cysteamine, an Encode product program described below, if completed within the five year anniversary date of the Encode Merger Agreement. The Company recorded this transaction as an asset purchase rather than a business combination, as Encode had not commenced planned principal operations at the time of the merger, such as generating revenues from its drug product candidate.
 
As a result of the merger with Encode, the Company received the exclusive worldwide license to DR Cysteamine (the “License Agreement”), developed by clinical scientists at the UCSD, School of Medicine. DR Cysteamine is a proprietary enterically coated formulation of cysteamine bitartrate, a cystine depleting agent currently approved by the U.S. Food and Drug Administration (“FDA”). Cysteamine bitartrate is prescribed for the management of the genetic disorder known as nephropathic cystinosis (“cystinosis”), a lysosomal storage disease. The active ingredient in DR Cysteamine has also demonstrated potential in studies as a treatment for other metabolic and neurodegenerative diseases, such as Huntington’s Disease and NASH.
 
In consideration of the grant of the license, the Company will be obligated to pay an annual maintenance fee until it begins commercial sales of any products developed pursuant to the License Agreement. In addition to the maintenance fee, the Company will be obligated to pay during the life of the License Agreement: milestone payments ranging from $20,000 to $750,000 for orphan indications and from $80,000 to $1,500,000 for non-orphan indications upon the occurrence of certain events, if ever; royalties on commercial net sales from products developed pursuant to the License Agreement ranging from 1.75% to 5.5%; a percentage of sublicense fees ranging from 25% to 50%; a percentage of sublicense royalties; and a minimum annual royalty commencing the year the Company begins commercially selling any products pursuant to the License Agreement, if ever. Under the License Agreement, the Company is obligated to fulfill predetermined milestones within a specified number of years ranging from 0.75 to 6 years from the effective date of the License Agreement, depending on the indication. To the extent that the Company fails to perform any of the obligations, UCSD may terminate the license or otherwise cause the license to become non-exclusive. Cumulatively, Raptor has expensed $470,000 in milestone payments to UCSD based upon the initiation of clinical trials in cystinosis, Huntington’s Disease and NASH.
 

 

-19-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
 
(A Development Stage Company)
 

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ISSUANCES OF COMMON STOCK AND WARRANTS IN CONNECTION WITH THE SALE OF UNITS IN A PRIVATE PLACEMENT
 
During the period from May 21, 2008 through June 27, 2008, Raptor entered into a Securities Purchase Agreement, as amended (the “2008 Private Placement Purchase Agreement”), with 11 investors for the private placement of units of the Company, each unit comprised of one share of Raptor’s Common Stock and one warrant to purchase one half of one share of Raptor’s Common Stock, at a purchase price of $2.14 per unit. Pursuant to the 2008 Private Placement Purchase Agreement, the Company sold an aggregate of 4,662,468 shares of Common Stock for aggregate gross proceeds of $10 million and issued to the investors warrants, exercisable for two years from the initial closing, which entitle the investors to purchase up to an aggregate of 2,331,234 shares of Common Stock of the Company and have an exercise price of either $3.22 or $3.86 per share, depending on when such warrants are exercised, if at all, and were valued at approximately $3 million (using the following Black-Scholes pricing model assumptions: risk-free interest rate 2%; expected term 2 years and annual volatility 121.45%).
 
In connection with the May / June 2008 private placement, the Company issued warrants and a cash fee to placement agents to compensate them for placing investors into the financing. Placement agents were issued warrants exercisable for 7% of Common Stock issued and issuable under the warrants issued to investors as part of the financing units and a cash fee based upon the proceeds of the sale of the units of the private placement. In connection with the sale of units, the Company issued placement agent warrants to purchase 489,559 shares of Raptor’s Common Stock at an exercise price of $2.36 per share for a five year term (valued at approximately $960,000 using the following Black-Scholes pricing model assumptions: risk-free interest rate 2%; expected term 5 years and annual volatility 121.45%) and cash fees to placement agents totaling $700,000. Of the placement agents compensated, Limetree Capital was issued warrants to purchase 438,890 shares of Raptor’s Common Stock and cash commission of $627,550. One of the Company’s Board members serves on the board of Limetree Capital.
 
On April 29, 2009, in order to reflect current market prices, Raptor notified the holders of warrants purchased in the May/June 2008 private placement that the Company was offering, in exchange for such warrants, new warrants to purchase its common stock at an exercise price of $1.29 per share, but only to the extent such exchange of the original warrants and exercise of the new warrants, including the delivery of the exercise price, occurred on or prior to July 17, 2009. The new warrants were valued at approximately $2.3 million based on the following Black-Scholes pricing model assumptions: risk-free interest rate 0.55%; expected term 1 year and annual volatility 231.97%. The warrants that were not exchanged prior to or on July 17, 2009 retained their original exercise prices of $3.86 per share and original expiration date of May 21, 2010. The Company received $2,614,500 of proceeds from warrant exercises that resulted in the issuance of 2,031,670 shares of Raptor’s common stock pursuant to the exchange described above.
 
On August 21, 2009, Raptor entered into a securities purchase agreement with four investors for the private placement of units of the Company at a purchase price of $1.37 per unit, each unit comprised of one share of Raptor’s common stock, par value $0.001 per share and one warrant to purchase one half of one share of Raptor’s common stock. Pursuant to the securities purchase agreement, the Company sold an aggregate of 1,738,226 units to the investors for aggregate gross proceeds of $2,386,000. The 1,738,226 units are comprised of an aggregate of 1,738,226 shares of common stock and warrants to purchase up to 869,113 shares of Raptor’s common stock valued at $1.0 million (using the following Black-Scholes pricing model assumptions: risk-free interest rate 1.11%; expected term 2 years and annual volatility 240.29%). The warrants, exercisable for two years from the closing, entitle the investors to purchase, in the aggregate, up to 869,113 shares of Raptor’s common stock and have an exercise price of either $2.57 until the first anniversary of issuance or $3.22 per share after the first anniversary of issuance.
 
 In connection with the August 2009 private placement, the Company issued warrants and a cash fee to Limetree Capital as its sole placement agent to compensate it for placing investors into the financing. Limetree Capital was issued warrants exercisable for 7% of common stock issued and issuable under the warrants issued to investors as part of the financing units and a 3.5% cash fee based upon the proceeds of the sale of the units of the August 2009 private placement. Limetree Capital was issued a five-year warrant to purchase 129,733 shares of Raptor’s Common Stock at an exercise price of $1.50 per share (valued at approximately $171,000 using the following Black-Scholes pricing model assumptions: risk-free interest rate 2.58%; expected term 5 years and annual volatility 240.29%) and cash commission of $59,360.
 

 

 

-20-

 
 
 
 

 
 
 

RAPTOR PHARMACEUTICAL CORP.
 
(A Development Stage Company)
 

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
2009 MERGER AND NASDAQ LISTING
 
On September 29, 2009, the Company, formerly known as TorreyPines Therapeutics, Inc. (“TorreyPines”) and RPC completed a reverse merger. The Company changed its name to “Raptor Pharmaceutical Corp.” and commenced trading on September 30, 2009 on the NASDAQ Capital Market under the ticker symbol “RPTP.”
 
In connection with the exchange of shares in the merger, immediately after the effective time of such merger, RPC and the Company’s stockholders owned 95% and 5% of the outstanding shares of the combined company, respectively. RPC stockholders received (as of immediately prior to such merger) 17,881,300 shares of the combined company’s common stock in exchange for the 76,703,147 shares of RPC’s common stock outstanding immediately prior to the closing of the merger. On September 29, 2009, immediately prior to the effective time of such merger, the Company’s board of directors, with the consent of RPC’s board of directors, acted to effect a reverse stock split of the issued and outstanding shares of the Company’s common stock such that every 17 shares of the Company’s common stock outstanding immediately prior to the effective time of the merger would represent one share of the Company’s common stock. Due to the reverse stock split implemented by the Company, the 15,999,058 shares of the Company’s common stock outstanding immediately prior to the closing of the merger became 940,863 shares of the combined company’s common stock.
 
In connection with the merger and subject to the same conversion factor as the RPC common stock (.2331234), the combined company assumed all of RPC’s stock options and warrants outstanding at the time of the merger. The combined company also retained the Company’s stock options and warrants outstanding at the merger, subject to the same adjustment factor as described above to give effect to the 1 for 17 reverse split.
 
The combined company is headquartered in Novato, California and is managed by Christopher M. Starr, Ph.D., as Chief Executive Officer and director, Todd C. Zankel, Ph.D., as Chief Scientific Officer, Kim R. Tsuchimoto as Chief Financial Officer, Ted Daley, as President of the clinical division and Patrice P. Rioux., M.D., Ph.D., as Chief Medical Officer of the clinical division.
 
There were a number of factors on which RPC’s board of directors relied in approving the 2009 Merger.  The primary reason for RPC’s board of directors’ decision to merge with TorreyPines was the benefit anticipated from the additional liquidity expected from having a NASDAQ trading market on which the combined company’s common stock could be listed, in addition to having access to an expanded pipeline of product candidates across a wider spectrum of diseases and markets.
 
The liquidity benefit is the primary factor behind the goodwill recognized in the transaction (see below). The goodwill has been assigned to the Company’s clinical segment and is expected to be fully deductible for tax purposes. Below is a breakdown of the assets acquired and liabilities assumed in the merger described herein (in millions, except for %):
 
Asset Allocation
Value (millions)
%
 
Cash and equivalents
$
0.58
 
13
 
Other current assets
 
0.10
 
2
 
Accrued liabilities
 
(0.68)
 
(15)
 
Intangible assets:
         
In-process research & development
 
0.90
 
20
 
Licenses
 
0.24
 
6
 
Total identifiable assets
 
1.14
 
26
 
Plus Goodwill
 
3.28
 
74
 
Total net assets acquired
$
4.42
 
100
 







-21-

 
 
 
 

 
 
 

 RAPTOR PHARMACEUTICAL CORP.
 
(A Development Stage Company)
 

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ISSUANCES OF COMMON STOCK AND WARRANTS IN CONNECTION WITH THE SALE OF UNITS IN A REGISTERED DIRECT OFFERING
 
On December 17, 2009, the Company entered into a Placement Agent Agreement with Ladenburg Thalmann & Co. Inc. as placement agent (the “2009 Placement Agent”), relating to the issuance and sale to the Direct Offering Investors (as defined below) pursuant to a registered direct offering (the “Direct Offering”) of up to 3,747,558  units (the “Units”), consisting of (i) 3,747,558 shares of the Company’s common stock, (ii) warrants to purchase an aggregate of up to 1,873,779 shares of the Company’s common stock (and the shares of common stock issuable from time to time upon exercise of such warrants) (the “Series A Warrants”), and (iii) warrants to purchase an aggregate of up to 1,873,779 shares of the Company’s common stock (and the shares of common stock issuable from time to time upon exercise of such warrants) (the “Series B Warrants,” and collectively with the Series A Warrants, the “Investor Warrants”).
 
The 2009 Placement Agent received a placement fee equal to 6.5% of the gross cash proceeds to the Company from the Direct Offering of the Units or $487,183 (excluding any consideration that may be paid in the future upon exercise of the Warrants), a warrant to purchase up to an aggregate of 74,951 shares of the Company’s common stock at $2.50 per share (valued at approximately $52,000 using the following Black-Scholes pricing model assumptions: risk-free interest rate 2.23%; expected term 5 years and annual volatility 49.28%) and $25,000 in out-of-pocket accountable expenses.  The warrant issued to Ladenburg has the same terms and conditions as the Investor Warrants except that the exercise price is 125% of the public offering price per share or $2.50 per share, and the expiration date is five years from the effective date of the Registration Statement.
 
In connection with the Direct Offering, following execution of the Placement Agent Agreement, the Company also entered into a definitive securities purchase agreement (the “Direct Offering Purchase Agreement”), dated as of December 17, 2009, with 33 investors set forth on the signature pages thereto (collectively, the “Direct Offering Investors”) with respect to the Direct Offering of the Units, whereby, on an aggregate basis, the Direct Offering Investors agreed to purchase 3,747,558 Units for a negotiated purchase price of $2.00 per Unit, amounting to gross proceeds of approximately $7.5 million and net proceeds after commissions and expenses of approximately $6.2 million.  Each Unit consists of one share of the Company’s common stock, one Series A Warrant exercisable for 0.5 of a share of the Company’s common stock and one Series B Warrant exercisable for 0.5 of a share of the Company’s common stock. The shares of the Company’s common stock and the Warrants were issued separately.  The Series A Warrants will be exercisable during the period beginning one hundred eighty (180) days after the date of issue and ending on the fifth (5th) anniversary of the date of issue.  The Series B Warrants will be exercisable during the period beginning one hundred eighty (180) days after the date of issue and ending on the eighteen (18) month anniversary of the date of issue.  The Investor Warrants have a per share exercise price of $2.45.  At closing of the financing, the Series A Warrants were valued at $1.3 million (using the following Black-Scholes pricing model assumptions: risk-free interest rate 2.23%; expected term 5 years and annual volatility 49.28%) and the Series B Warrants were valued at $0.5 million (using the following Black-Scholes pricing model assumptions: risk-free interest rate 0.56%; expected term 18 months and annual volatility 49.28%).  Based on the underlying terms of the Investor Warrants and Placement Agent Warrants, the Investor Warrants and the Placement Agent Warrants are classified as liability, as discussed further below in Note 10.
 
ISSUANCES OF COMMON STOCK IN CONNECTION WITH AN EQUITY LINE
 
On April 16, 2010, the Company signed a purchase agreement with Lincoln Park Capital Fund, LLC (“LPC”), together with a registration rights agreement, whereby LPC has agreed to purchase up to $15 million of the Company’s common stock over a 25 month period.  Under the registration rights agreement, the Company agreed to file a registration statement related to the transaction with the U.S. Securities and Exchange Commission (“SEC”) covering the shares that have been issued or may be issued to LPC under the purchase agreement.  Such registration statement was declared effective by the SEC on May 7, 2010.  A post-effective amendment to such registration statement was filed on November 23, 2010 and was declared effective by the SEC on December 1, 2010.  The Company has the right over a 25-month period to sell its shares of common stock to LPC in amounts of $100,000 to up to $1,000,000 per sale, depending on certain conditions as set forth in the purchase agreement, up to the aggregate amount of $15 million.  The purchase agreement may be terminated by the Company at any time at its discretion without any cost to the Company.
 

 

 
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RAPTOR PHARMACEUTICAL CORP.
 
(A Development Stage Company)
 

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The purchase price of the shares issued to LPC under the purchase agreement is based on the prevailing market prices of the Company’s shares at the time of sale without any fixed discount. The Company controls the timing and amount of any sales of shares to LPC.  LPC does not have the right or the obligation to purchase any shares of the Company’s common stock on any business day that the purchase price of the Company’s common stock is below $1.50 per share.
 
In consideration for entering into the purchase agreement (the “LPC Purchase Agreement”), the Company issued to LPC 145,033 shares of common stock valued at $246,556 (recorded as deferred offering costs on the Company’s balance sheet and amortized over the usage of the equity line) as a commitment fee and is required to issue up to an additional 217,549 shares of its common stock pro rata as LPC purchases the $15 million of the Company’s common stock over the 25-month period. Since inception, the Company sold 4,186,038 shares to LPC at a weighted average price of $2.78 and paid commitment fees to LPC in the form of 168,929 shares (in addition to the 145,033 shares issued as the initial commitment fee), valued at $581,081.  The Company has issued an aggregate of 4,500,000 shares (including shares issued to LPC as commitment fees) to LPC pursuant to the LPC Purchase Agreement and does not plan to issue or register additional shares under such agreement.
 
2010 PRIVATE PLACEMENT
 
On August 9, 2010, the Company entered into a securities purchase agreement with 23 investors set forth on the signature pages thereto (the “U.S. Investors”) and a separate securities purchase agreement with a certain Canadian investor (the “Canadian Investor” and together with the U.S. Investors, the “2010 Private Placement Investors”) set forth on the signature pages thereto (collectively, the “2010 Private Placement Purchase Agreements”), for the private placement (the “2010 Private Placement”) of the Company’s common stock and warrants to purchase its common stock, at a purchase price of $3.075 per unit, with each unit comprised of one share of common stock and a warrant to purchase one share of common stock.   JMP Securities LLC (the “2010 Placement Agent”) served as the Company’s placement agent in the 2010 Private Placement.
 
The closing of this private placement occurred on August 12, 2010.  The Company issued and sold an aggregate of 4,897,614 units, comprised of 4,897,614 shares of common stock and warrants to purchase up to 4,897,614 shares of its common stock for gross proceeds of approximately $15.1 million.  Each warrant, exercisable for 5 years from August 12, 2010, has an exercise price of $3.075 per share.  At closing of the 2010 Private Placement, the warrants issued to investors were valued at approximately $7.8 million (using the following Black-Scholes pricing model assumptions: risk-free interest rate 1.74%; expected term 5 years and annual volatility 85.14%.) As the placement agent for the 2010 Private Placement, the 2010 Placement Agent was issued one warrant to purchase 97,952 shares of the Company’s common stock (valued at approximately $0.2 million, based upon the same Black-Scholes inputs as the investor warrants), paid a cash commission of $978,911 and reimbursed for certain of its expenses incurred in connection with the 2010 Private Placement.
 
In connection with the 2010 Private Placement, on August 12, 2010, the Company entered into a registration rights agreement with the 2010 Private Placement Investors, pursuant to which the Company filed with the SEC a registration statement related to the 2010 Private Placement covering the resale of the common stock issued to the 2010 Private Placement Investors under the 2010 Private Placement Purchase Agreements and the shares of common stock that will be issued to the 2010 Private Placement Investors upon exercise of the warrants, including the warrant issued to the 2010 Placement Agent.  Such registration statement was declared effective on August 31, 2010.  A post-effective amendment to such registration statement was filed on November 23, 2010 and was declared effective by the SEC on December 1, 2010.













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RAPTOR PHARMACEUTICAL CORP.
 
(A Development Stage Company)
 

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The following is a summary of common stock outstanding as of May 31, 2011:
 
 
Transaction
 
 
Date of Issuance
 
Common Stock
Issued
 
Founders’ shares
 
Sept. 2005
   
1,398,742
 
Seed round
 
Feb. 2006
   
466,247
 
PIPE concurrent with reverse merger
 
May 2006
   
1,942,695
 
Shares issued in connection with reverse merger
 
May 2006
   
3,100,541
 
Warrant exercises
 
Jan. – Nov. 2007
   
1,513,359
 
Stock option exercises
 
Mar. 2007
   
3,380
 
Loan finder’s fee
 
Sept. 2007
   
46,625
 
Convivia asset purchase
 
Oct. 2007 – June 2010
   
160,272
 
Encode merger DR Cysteamine asset purchase
 
Dec. 2007
   
802,946
 
Shares issued pursuant to consulting agreement
 
May 2008
   
2,040
 
PIPE — initial tranche
 
May 2008