Raptor Pharmaceutical Corp.
Raptor Pharmaceutical Corp (Form: 10-Q, Received: 07/10/2012 15:39:47)
Table of Contents
 
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 ended May 31, 2012
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   x     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
 
x
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
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 49,128,366 shares of the registrant's common stock, par value $0.001, outstanding as of June 28, 2012.
 


RAPTOR PHARMACEUTICAL CORP.
FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2012
 Table of Contents
 
 
 
 
 
 
 
 
 
  
 
  
Page
 
Part 1 - Financial Information
  
Item 1
  
Financial Statements
  
 
 
 
 
  
Condensed Consolidated Balance Sheets as of May 31, 2012 (unaudited) and August 31, 2011
  
 
  
 
  
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three month periods ended May 31, 2012 and 2011
  
 
  
 
  
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the nine month periods ended May 31, 2012 and 2011 and the cumulative period from September 8, 2005 (inception) to May 31, 2012
  
 
  
 
  
Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit) for the nine month period ended May 31, 2012
  
 
  
 
  
Unaudited Condensed Consolidated Statements of Cash Flows for the nine month periods ended May 31, 2012 and 2011 and the cumulative period from September 8, 2005 (inception) to May 31, 2012
  
 
  
 
  
Notes to Condensed Consolidated Financial Statements
  
 
  
Item 2
  
Management's Discussion and Analysis of Financial Condition and Results of Operations
  
 
  
Item 3
  
Quantitative and Qualitative Disclosures About Market Risk
  
 
  
Item 4
  
Controls and Procedures
  
 
  
Part II - Other Information
  
Item 1
  
Legal Proceedings
  
 
  
Item 1A
  
Risk Factors
  
 
  
Item 2
  
Unregistered Sales of Equity Securities and Use of Proceeds
  
 
  
Item 3
  
Defaults Upon Senior Securities
  
 
  
Item 4
  
Mine Safety Disclosures
  
 
  
Item 5
  
Other Information
  
 
  
Item 6
  
Exhibits
  
 
  
SIGNATURES
  
 
  
 
 

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
 Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 
 
   
  
May 31,
2012
(unaudited)
 
 
August 31,
2011
(1)
 
ASSETS
  
 
 
 
 
 
 
 
Current assets:
  
 
 
 
 
 
 
 
Cash and cash equivalents
  
$
17,760,689
  
 
$
15,172,086
  
Restricted cash
  
 
168,876
  
 
 
114,468
  
Short-term investments
  
 
25,381,868
  
 
 
-
 
Prepaid expenses and other
  
 
2,446,670
  
 
 
415,944
  
 
  
 
 
 
 
 
 
 
Total current assets
  
 
45,758,103
  
 
 
15,702,498
 
Intangible assets, net
  
 
3,141,417
  
 
 
3,250,917
  
Goodwill
  
 
3,275,403
  
 
 
3,275,403
  
Fixed assets, net
  
 
316,057
  
 
 
76,997
  
Deposits
  
 
104,906
  
 
 
104,906
  
Deferred offering costs
  
 
119,592
 
 
 
151,783
  
 
  
 
 
 
 
 
 
 
Total assets
  
$
52,715,478
  
 
$
22,562,504
  
 
  
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  
 
 
 
 
 
 
 
Liabilities
  
 
 
 
 
 
 
 
Current liabilities:
  
 
 
 
 
 
 
 
Accounts payable
  
$
1,912,321
  
 
$
847,137
  
Accrued liabilities
  
 
3,006,495
  
 
 
2,249,254
  
Common stock warrant liability
  
 
19,137,907
  
 
 
23,575,294
  
Deferred rent
  
 
20,101
  
 
 
24,136
  
Capital lease liability - current
  
 
7,873
  
 
 
3,953
  
 
  
 
 
 
 
 
 
 
Total current liabilities
  
 
24,084,697
  
 
 
26,699,774
  
Capital lease liability - long-term
  
 
15,556
  
 
 
9,778
  
 
  
 
 
 
 
 
 
 
Total liabilities
  
 
24,100,253
  
 
 
26,709,552
  
 
  
 
 
 
 
 
 
 
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 49,086,807 and 35,569,188 shares issued and outstanding as at May 31, 2012 and August 31, 2011, respectively
  
 
49,089
  
 
 
35,569
  
Additional paid-in capital
  
 
135,005,481
  
 
 
73,817,083
  
Accumulated other comprehensive income (loss)
  
 
(15,840
)
 
 
1,904
  
Deficit accumulated during development stage
  
 
(106,423,505
)
 
 
(78,001,604
)
 
  
 
 
 
 
 
 
 
Total stockholders' equity (deficit)
  
 
28,615,225
  
 
 
(4,147,048
)
 
  
 
 
 
 
 
 
 
Total liabilities and stockholders' equity (deficit)
  
$
52,715,478
  
 
$
22,562,504
  
 
  
 
 
 
 
 
 
 

(1)
Derived from the Company's audited consolidated financial statements as of August 31, 2011.
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
  
For the three months ended
 
 
  
May 31, 2012
 
 
May 31, 2011
 
Revenues:
  
$
-  
  
 
$
-  
  
 
  
 
 
 
 
 
 
 
Operating expenses:
  
 
 
 
 
 
 
 
General and administrative
  
 
4,104,552
  
 
 
1,733,218
  
Research and development
  
 
6,019,680
  
 
 
3,901,651
  
 
  
 
 
 
 
 
 
 
Total operating expenses
  
 
10,124,232
  
 
 
5,634,869
  
 
  
 
 
 
 
 
 
 
Loss from operations
  
 
(10,124,232
)
 
 
(5,634,869
)
Interest income
  
 
90,806
  
 
 
12,116
  
Interest expense
  
 
(878
)
 
 
(486
)
Foreign currency transaction gain (loss)
  
 
44,582
  
 
 
(1,910
Unrealized gain on short-term investments
  
 
55,556
  
 
 
-  
 
Adjustment to fair value of common stock warrants
  
 
6,937,282
 
 
 
(14,641,775
 
  
 
 
 
 
 
 
 
Net loss
  
 
(2,996,884
)
 
 
(20,266,924
)
Other comprehensive income (loss)
  
 
 
 
 
 
 
 
Foreign currency translation adjustment
  
 
(10,861
)
 
 
1,910
 
 
  
 
 
 
 
 
 
 
Comprehensive loss
  
$
(3,007,745
)
 
$
(20,265,014
 
  
 
 
 
 
 
 
 
Net loss per share:
  
 
 
 
 
 
 
 
Basic and diluted
  
$
(0.06
)
 
$
(0.62
)
 
  
 
 
 
 
 
 
 
Weighted-average shares outstanding used to compute:
  
 
 
 
 
 
 
 
Basic and diluted
  
 
48,954,000
  
 
 
32,594,450
  
 
  
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
For the nine months ended
 
 
For the period from
September 8, 2005
(inception) to
 
 
  
May 31, 2012
 
 
May 31, 2011
 
 
May 31, 2012
 
Revenues:
  
$
-  
 
 
$
-  
 
 
$
-  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
  
 
 
 
 
 
 
 
 
 
 
 
General and administrative
  
 
8,893,258
  
 
 
4,565,829
  
 
 
25,747,281
  
Research and development
  
 
15,007,330
  
 
 
10,266,027
  
 
 
54,244,620
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
  
 
23,900,588
  
 
 
14,831,856
  
 
 
79,991,901
 
 
  
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
  
 
(23,900,588
)
 
 
(14,831,856
)
 
 
(79,991,901
)
Interest income
  
 
262,398
  
 
 
31,348
  
 
 
634,838
  
Interest expense
  
 
(1,595
)
 
 
(1,484
)
 
 
(117,725
)
Foreign currency transaction gain
  
 
122,267
  
 
 
89
  
 
 
151,129
  
Unrealized gain on short-term investments
  
 
140,716
  
 
 
-  
 
 
 
140,716
  
Adjustment to fair value of common stock warrants
  
 
(5,045,099
)
 
 
(18,558,182
)
 
 
(27,240,562
)
 
  
 
 
 
 
 
 
 
 
 
 
 
Net loss
  
 
(28,421,901
)
 
 
(33,360,085
)
 
 
(106,423,505
)
Other comprehensive gain (loss)
  
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
  
 
(17,744
)
 
 
7,459
 
 
 
(15,840
)
 
  
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
  
$
(28,439,645
)
 
$
(33,352,626
)
 
$
(106,439,345
)
 
  
 
 
 
 
 
 
 
 
 
 
 
Net loss per share:
  
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
  
$
(0.60
)
 
$
(1.06
)
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding used to compute:
  
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
  
 
47,514,195
  
 
 
31,536,829
  
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Nine Months Ended May 31, 2012
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Common stock
 
  
Additional paid-
 
  
Accumulated
other
comprehensive
 
 
Deficit
accumulated
during
development
 
 
 
 
 
  
Shares
 
  
Amount
 
  
in capital
 
  
income (loss)
 
 
stage
 
 
Total
 
Balance at August 31, 2011
  
 
35,569,188
  
  
$
35,569
  
  
$
73,817,083
  
  
$
1,904
  
 
$
(78,001,604
)
 
$
(4,147,048
)
Exercise of common stock warrants
  
 
1,831,078
  
  
 
1,833
  
  
 
5,011,815
  
  
 
-  
  
 
 
-  
  
 
 
5,013,648
  
Exercise of common stock options
  
 
122,541
  
  
 
123
  
  
 
266,173
  
  
 
-  
  
 
 
-  
  
 
 
266,296
  
Employee stock-based compensation expense
  
 
-  
  
  
 
-  
  
  
 
3,219,416
  
  
 
-  
  
 
 
-  
  
 
 
3,219,416
  
Consultant stock-based compensation expense
  
 
-  
  
  
 
-  
  
  
 
46,289
  
  
 
-  
  
 
 
-  
  
 
 
46,289
  
Reclassification of the fair value of warrant liabilities upon exercise
  
 
-  
  
  
 
-  
  
  
 
9,482,486
  
  
 
-  
  
 
 
-  
  
 
 
9,482,486
  
Issuance of common stock in a follow-on public offering at $4.00 per share purchase price, net of fundraising costs totaling $3,166,146
  
 
11,500,000
  
  
 
11,500
  
  
 
42,820,702
  
  
 
-  
  
 
 
-  
  
 
 
42,832,202
  
Issuance of common stock under an at-the-market sales agreement, net of commissions totaling $10,564
  
 
64,000
 
 
 
64
 
 
 
341,517
  
  
 
-  
  
 
 
-  
  
 
 
341,581
  
Foreign currency translation loss
  
 
-  
  
  
 
-  
  
  
 
-  
  
  
 
(17,744
)
 
 
-  
  
 
 
(17,744
)
Net loss
  
 
-  
  
  
 
-  
  
  
 
-  
  
  
 
-  
  
 
 
(28,421,901
)
 
 
(28,421,901
)
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
Balance at May 31, 2012
  
 
49,086,807
  
  
$
49,089
  
  
$
135,005,481
  
  
$
(15,840
)
 
$
(106,423,505
)
 
$
28,615,225
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 Raptor Pharmaceutical Corp.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
For the nine months ended
 
 
For the
cumulative period
from September 8,
2005 (inception)
 
 
  
May 31,
2012
 
 
May 31,
2011
 
 
to May 31,
2012
 
Cash flows from operating activities:
  
 
 
 
 
 
 
 
 
 
 
 
Net loss
  
$
(28,421,901
 
$
(33,360,085
 
$
(106,423,505
Adjustments to reconcile net loss to net cash used in operating activities:
  
 
 
 
 
 
 
 
 
 
 
 
Employee stock-based compensation exp.
  
 
3,219,416
  
 
 
1,541,888
  
 
 
6,570,778
  
Consultant stock-based compensation exp.
  
 
46,289
  
 
 
38,016
  
 
 
729,611
  
Fair value adjustment of common stock warrants
  
 
5,045,099
  
 
 
18,558,182
  
 
 
27,240,562
  
Amortization of intangible assets
  
 
109,500
  
 
 
115,125
  
 
 
660,458
  
Depreciation of fixed assets
  
 
35,534
  
 
 
58,182
  
 
 
536,307
  
Unrealized gain on short-term investments
  
 
(140,717
 
 
-  
  
 
 
(140,717
Write-off of intangible assets and other intellectual property
  
 
-  
  
 
 
-  
  
 
 
348,750
 
Amortization of capitalized finder's fee
  
 
-  
  
 
 
-  
  
 
 
102,000
  
Capitalized acquisition costs previously expensed
  
 
-  
  
 
 
-  
  
 
 
38,000
  
Changes in assets and liabilities:
  
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other
  
 
(2,030,726
)
 
 
94,824
  
 
 
(2,347,232
Intangible assets
  
 
-  
  
 
 
-  
  
 
 
(150,000
Deposits
  
 
-  
  
 
 
(2,000
 
 
(104,907
Accounts payable
  
 
1,065,184
  
 
 
507,303
  
 
 
1,912,321
  
Accrued liabilities
  
 
757,241
  
 
 
(112,498
 
 
2,325,769
  
Deferred rent
  
 
(4,035
)  
 
 
24,356
  
 
 
19,996
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
  
 
(20,319,116
 
 
(12,536,707
 
 
(68,681,809
 
  
 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
  
 
 
 
 
 
 
 
 
 
 
 
Purchase of fixed assets
  
 
(274,594
 
 
(29,989
 
 
(821,120
Cash acquired in 2009 Merger
  
 
-  
  
 
 
-  
  
 
 
581,391
  
Increase in restricted cash
  
 
(54,408
 
 
(114,282
 
 
(168,876
Purchase of short-term investments
  
 
(30,241,151
 
 
-  
  
 
 
(30,241,151
Sale of short-term investments
  
 
5,000,000
 
 
 
-  
  
 
 
5,000,000
 
 
  
 
 
 
 
 
 
 
 
 
 
 
Net cash used in investing activities
  
 
(25,570,153
 
 
(144,271
 
 
(25,649,756
 
  
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
  
 
 
 
 
 
 
 
 
 
 
 
Proceeds from the sale of common stock
  
 
46,000,000
  
 
 
-  
  
 
 
85,941,278
  
Proceeds from the sale of common stock under an equity line
  
 
-  
  
 
 
6,747,778
  
 
 
11,639,568
  
Proceeds from the sale of common stock under an ATM agreement
  
 
352,145
  
 
 
-  
  
 
 
352,145
  
Proceeds from the exercise of common stock warrants
  
 
5,013,648
  
 
 
2,300,838
  
 
 
20,911,147
  
Proceeds from the exercise of common stock options
  
 
266,296
  
 
 
8,828
  
 
 
434,904
  
Fundraising costs
  
 
(3,026,579
 
 
(8,182
 
 
(7,353,543
Deferred offering costs
  
 
(119,592
 
 
-  
 
 
 
(119,592
Proceeds from the sale of common stock to initial investors
  
 
-  
  
 
 
-  
  
 
 
310,000
  
Proceeds from bridge loan
  
 
-  
  
 
 
-  
  
 
 
200,000
  
Repayment of bridge loan
  
 
-  
  
 
 
-  
  
 
 
(200,000
Additions and payments on capital lease
  
 
9,698
 
 
 
(3,572
 
 
(7,813
 
  
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities
  
 
48,495,616
  
 
 
9,045,690
  
 
 
112,108,094
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
  
 
(17,744
)
 
 
7,459
  
 
 
(15,840
 
  
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
  
 
2,588,603
  
 
 
(3,627,829
 
 
17,760,689
  
Cash and cash equivalents, beginning of period
  
 
15,172,086
  
 
 
16,953,524
 
 
 
-  
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
  
$
17,760,689
  
 
$
13,325,695
  
 
$
17,760,689
  
 
  
 
 
 
 
 
 
 
 
 
 
 

Supplemental disclosure of non-cash financing activities:
  
 
 
 
 
 
 
 
 
 
 
 
Warrants issued in connection with financing
  
$
-  
  
 
$
-  
  
 
$
16,310,414
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Initial fair value of warrants issued to placement agents in connection with financings 
  
$
-  
  
 
$
-  
  
 
$
208,660
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Common stock and warrants issued in connection with reverse merger
  
$
-  
  
 
$
-  
  
 
$
4,417,046
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Common stock issued as fee for equity line
  
$
-  
  
 
$
352,500
  
 
$
827,637
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Fair value of warrant liability reclassified to equity upon exercise
  
$
9,482,486
  
 
$
1,485,643  
  
 
$
17,988,157
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Acquisition of equipment in exchange for capital lease
  
$
12,943
  
 
$
-  
  
 
$
48,077
  
 
  
 
 
 
 
 
 
 
 
 
 
 
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 condensed consolidated financial statements.
 

 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 ("GAAP"). 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. In December 2011, RPC merged into Raptor Pharmaceutical Corp.
The following reflects the Company's current, post-2009 Merger corporate structure (jurisdiction of incorporation/registration):

Raptor Pharmaceutical Corp., formerly TorreyPines Therapeutics, Inc. (Delaware)
                |                                                                                  |
    Raptor Therapeutics Inc. (Delaware)        Raptor Discoveries Inc. (Delaware)
                |                                     |
                |                 Raptor European Products, LLC (Delaware)
                |                                     |
        RPTP European Holdings C.V. (Netherlands)
                                        |
    Raptor Pharmaceuticals Europe B.V. (Netherlands)
 
 
RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Raptor, a publicly-traded biotechnology company, seeks to research, manufacture, and commercialize medicines that improve life for patients with severe, rare disorders. Raptor currently has product candidates in clinical development designed to potentially treat nephropathic cystinosis, Non-alcoholic Steatohepatitis ("NASH"), Huntington's Disease ("HD"), aldehyde dehydrogenase deficiency ("ALDH2"), and thrombotic disorder. Raptor's preclinical programs are based upon bioengineered novel drug candidates and drug-targeting platforms derived from the human receptor-associated protein and related proteins that are designed to target cancer and infectious diseases.
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 Discoveries Inc., Raptor Therapeutics Inc. and Raptor European Products, LLC, such subsidiaries incorporated in Delaware on September 8, 2005 (date of inception), August 1, 2007, and February 14, 2012, respectively, and Raptor Pharmaceuticals Europe B.V. and RPTP European Holdings C.V., incorporated/registered in the Netherlands on December 15, 2009 and February 16, 2012, 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 May 31, 2012, the Company had accumulated losses of approximately $106.4 million. Management expects to incur further losses for the foreseeable future. Management believes that the Company's cash, cash equivalents and short term investments as of May 31, 2012 of approximately $43.1 million will be sufficient to meet the Company's operating requirements and obligations through the first calendar quarter of 2013. 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 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.
The Company's independent registered public accounting firm has audited the Company's consolidated financial statements for the years ended August 31, 2011 and 2010 and for the period from September 8, 2005 (inception) to August 31, 2011. The November 14, 2011 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 or sustained operating profits to date.


 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(b) Use of Estimates
The preparation of financial statements in conformity with GAAP 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. ("BV"), the Company's European subsidiary, uses the European Euro as its functional currency. At each quarter end, 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. 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) 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. Restricted cash represents compensating balances required by the Company's U.S. and European banks as collateral for credit cards.
(f) Short-term Investments
The Company invests in short-term investments in high credit-quality funds in order to obtain higher yields on its idle cash. Short-term investments consisted of:
 
 
 
 
 
 
 
 
 
 
 
  
May 31,
2012
 
  
August 31,
2011
 
Adjustable-rate government fund
  
$
15,215,961
  
  
$
-  
  
Ultra short-term income fund
  
 
10,165,907
  
  
 
-  
  
 
  
 
 
 
  
 
 
 
Total short-term investments
  
$
25,381,868
  
  
$
-  
  
 
  
 
 
 
  
 
 
 
Such investments are not insured by the Federal Deposit Insurance Corporation. The Company completed an evaluation of its investments and determined that it did not have any other-than-temporary impairments as of May 31, 2012. The investments are placed in financial institutions with strong credit ratings and management expects full recovery of the carrying amounts.
(g) Deferred Offering Costs
Deferred offering costs represent expenses incurred to raise equity capital related to financing transactions which have not yet been completed as of the balance sheet dates.
RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(h) Intangible Assets
Intangible assets include the intellectual property and other rights relating to DR Cysteamine (currently developed as RP103 and RP104), 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 RP103/RP104 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.
(i) 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. An impairment analysis is performed, and if necessary, a resulting write-down in valuation is recorded.
(j) 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.
(k) 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. During the nine months ending May 31, 2012, the Company has not identified any such impairment losses.
(l) 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 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 comprehensive loss. Warrants which are recorded as liabilities that are exercised are re-measured and marked to market the day prior to exercise. Upon exercise of such warrants, the fair value of such warrants is reclassified to equity.
RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(m) 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.
The Company's effective tax rate is 0% for income tax for the nine months ended May 31, 2012 and the Company expects that its effective tax rate for the full year 2012 will be 0%. Based on the weight of available evidence, including cumulative losses since inception and expected future losses, the Company has determined that it is more likely than not that the deferred tax asset amount will not be realized and therefore a full valuation allowance has been provided on the Company's net deferred tax assets.
Utilization of the Company's net operating loss ("NOL") carryovers may be subject to substantial annual limitation due to the ownership change rules under the Internal Revenue Code and similar state income tax law provisions including those related to the suspension and limitation of NOL carryovers for certain tax years. Such an annual limitation could result in the expiration of the NOL carryovers before utilization.
On September 1, 2009, the Company adopted the provisions of ASC No. 740-10, Accounting for Uncertainty in Income Taxes ("ASC 740-10").  ASC 740-10 requires entities following GAAP to identify uncertain tax positions and disclose any potential tax liability on their financial statements using a two-step process, which includes recognition and measurement.
The Company's continuing practice is to recognize interest and/or penalties related to income tax matters as a component of income tax expense. As of May 31, 2012, there was no accrued interest and penalties related to uncertain tax positions.
The Company files U.S. Federal and California state income tax returns. The Company is currently not subject to any income tax examinations. Due to the Company's NOLs, generally all tax years remain open.
As disclosed in the Company's Form 8-K dated April 19, 2012, the Company entered into a Platform Contribution Transaction Agreement (the "Agreement") with its wholly-owned indirect subsidiary, RPTP European Holdings C.V., relating to certain intellectual property of the Company.  To date, the Company has not recorded any transactions related to such Agreement.
  (n) 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, commercial drug manufactured prior to obtaining marketing approval, 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.
(o) 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. In-process research and development that is amortized or expensed is recorded as part of research and development expenses on the Company's condensed consolidated statements of comprehensive loss. The Company reviews each product candidate acquisition to determine the existence of in-process research and development.
RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(p) 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, 2012
 
  
May 31, 2011
 
Warrants to purchase common stock
  
 
5,187,772
  
  
 
9,425,017
  
Options to purchase common stock
  
 
6,095,435
  
  
 
3,589,940
  
 
  
 
 
 
  
 
 
 
Total potentially dilutive securities
  
 
11,283,207
  
  
 
13,014,957
  
 
  
 
 
 
  
 
 
 
Net loss per share, basic and diluted, was $(0.06) and $(0.62) for the three month periods ended May 31, 2012 and 2011, respectively. Net loss per share, basic and diluted, was $(0.60) and $(1.06) for the nine month periods ended May 31, 2012 and 2011, respectively.
(q) Comprehensive Loss
Components of comprehensive loss are reported in the Company's condensed consolidated statements of comprehensive loss in the period in which they are recognized. The components of comprehensive loss include net loss and foreign currency translation adjustments.
(r) 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 period. The fair value of the equity award granted is estimated on the date of the grant. 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 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 7, Stock Option Plans, for further discussion of employee stock-based compensation.
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(s) Recent Accounting Pronouncements
In December 2010, the FASB issued Accounting Standards Update ("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 adopted these standards on September 1, 2011 and has determined that ASU 2010-28 had no material impact on its condensed consolidated financial statements for the three and nine month periods ended May 31, 2012, because there was no requirement to perform Step 2 due to the Company's positive carrying amount.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations ("ASU 2010-29"). ASU 2010-29 is an update that addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations if the entity presents comparative financial statements and expands the required disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This standard is effective prospectively for business combinations for which the acquisition dates are on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company adopted these standards on September 1, 2011; however, since there were no business combinations during the three and nine month periods ended May 31, 2012, ASU 2010-29 had no material impact on the Company's financial disclosure. However, the provision will impact the financial disclosures of any business combinations in the future.
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 GAAP and IFRSs ("ASU 2011-04"). ASU 2011-04 is intended to result in convergence between 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 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 has adopted these standards on March 1, 2012 and has determined that ASU 2011-04 did not have a material impact on its condensed consolidated financial statements.
In June 2011, the 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 early adopted these standards as of August 31, 2011. Because ASU 2011-05 impacts presentation only, it had no effect on the Company's condensed consolidated financial statements or on its financial condition for the three and nine month periods ended May 31, 2012.
In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08"), which permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Because the Company has only one reporting unit, which has a fair value higher than its carrying amount, adoption of ASU 2011-08 did not have a material impact on the Company's condensed consolidated financial statements for the three and nine month periods ended May 31, 2012.
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(3) INTANGIBLE ASSETS AND GOODWILL
On December 14, 2007, the Company acquired the intellectual property and other rights to develop RP103/RP104 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 8 below.
Summary of intangibles acquired as discussed above:
 
 
 
 
 
 
 
 
 
 
 
  
May 31,
2012
 
 
August 31,
2011
 
Intangible asset (IP license for RP103/RP104) related to the Encode merger
  
$
2,620,000
  
 
$
2,620,000
  
Intangible assets (out-license) related to the 2009 Merger
  
 
240,000
  
 
 
240,000
  
In-process research and development (IP license for tezampanel) related to the 2009 Merger
  
 
900,000
  
 
 
900,000
  
 
  
 
 
 
 
 
 
 
Total intangible assets
  
 
3,760,000
  
 
 
3,760,000
  
Less accumulated amortization
  
 
(618,583
)
 
 
(509,083
)
 
  
 
 
 
 
 
 
 
Intangible assets, net
  
$
3,141,417
  
 
$
3,250,917
  
 
  
 
 
 
 
 
 
 
The intangible assets related to RP103/RP104 are being amortized monthly over 20 years, which are the lives 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 month periods ended May 31, 2012 and 2011, the Company amortized $36,500 and $18,741, respectively, of intangible assets to research and development expense. During the nine month periods ended May 31, 2012 and 2011 and the cumulative period from September 8, 2005 (inception) to May 31, 2012, the Company amortized $109,500, $115,125 and $660,458 (included $41,875 related to NeuroTrans™ which was written off as of August 31, 2011), respectively, of intangible assets to research and development expense.
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table summarizes the actual and estimated amortization expense for intangible assets for the periods indicated:
 
 
 
 
 
 
Amortization period
  
Amortization
expense
 
Fiscal year ending August 31, 2012 - estimate
  
 $
146,000
  
Fiscal year ending August 31, 2013 - estimate
  
 
146,000
  
Fiscal year ending August 31, 2014 - estimate
  
 
146,000
  
Fiscal year ending August 31, 2015 - estimate
  
 
146,000
  
Fiscal year ending August 31, 2016 - estimate
  
 
146,000
  
Goodwill of $3,275,403 represents the excess of total consideration recorded for the 2009 Merger over the value of the assets assumed. The Company tested the carrying value of goodwill for impairment as of its fiscal year ended August 31, 2011 and determined that there was no impairment. Intangibles are tested for impairment whenever events indicate that their carrying values may not be recoverable. During the year ended August 31, 2011, the NeuroTrans™ asset was written off with a carrying value of $108,250 due to the termination of a collaboration agreement.
(4) FIXED ASSETS
Fixed assets consisted of:
 
 
 
 
 
 
 
 
 
 
 
 
Category
  
May 31, 2012
 
 
August 31, 2011
 
 
Estimated useful lives
Leasehold improvements
  
$
145,903
  
 
$
124,763
  
 
Shorter of life of
asset or lease term
Office furniture
  
 
3,188
  
 
 
3,188
  
 
7 years
Laboratory equipment
  
 
503,704
  
 
 
285,346
  
 
5 years
Computer hardware and software
  
 
153,381
  
 
 
131,229
  
 
3 years
Capital lease equipment
  
 
26,674
  
 
 
13,730
  
 
Shorter of life of
asset or lease term
 
  
 
 
 
 
 
 
 
 
 
Total at cost
  
 
832,850
  
 
 
558,256
  
 
 
Less: accumulated depreciation
  
 
(516,793
)
 
 
(481,259
)
 
 
 
  
 
 
 
 
 
 
 
 
 
Total fixed assets, net
  
$
316,057
  
 
$
76,997
  
 
 
 
  
 
 
 
 
 
 
 
 
 
Depreciation expense for the three month periods ended May 31, 2012 and 2011 was $17,570 and $18,742, respectively. Depreciation expense for the nine month periods ended May 31, 2012 and 2011 and the cumulative period from September 8, 2005 (inception) to May 31, 2012 was $35,534, $58,182 and $536,307, respectively. Accumulated depreciation on capital lease equipment was $3,501 and zero as of May 31, 2012 and August 31, 2011, respectively.
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(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, 2012 and August 31, 2011 are summarized as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
  
Level 1
 
  
Level 2
 
  
Level 3
 
  
May 31,
2012
 
Fair value of cash equivalents
  
$
17,145,998
  
  
$
-  
  
  
$
-  
  
  
$
17,145,998
  
Restricted cash
  
 
-  
  
  
 
168,876
  
  
 
-  
  
  
 
168,876
  
Short-term investments
  
 
25,381,868
  
  
 
-  
  
  
 
-  
  
  
 
25,381,868
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
42,527,866
  
  
$
168,876
  
  
$
-  
  
  
$
42,696,742
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
Liabilities
  
 
 
  
 
 
  
 
 
  
 
 
Fair value of common stock warrants
  
$
-  
  
  
$
-  
  
  
$
19,137,907
  
  
$
19,137,907
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
-  
  
  
$
-  
  
  
$
19,137,907
  
  
$
19,137,907
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
Assets
  
Level 1
 
  
Level 2
 
  
Level 3
 
  
August 31, 2011
 
Fair value of cash equivalents
  
$
13,855,813
  
  
$
-  
  
  
$
-  
  
  
$
13,855,813
  
Restricted cash
  
 
-  
  
  
 
114,468
  
  
 
-  
  
  
 
114,468
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
13,855,813
  
  
$
114,468
  
  
$
-  
  
  
$
13,970,281
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
Liabilities
  
 
 
  
 
 
  
 
 
  
 
 
Fair value of common stock warrants
  
$
-  
  
  
$
-  
  
  
$
23,575,294
  
  
$
23,575,294
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
-  
  
  
$
-  
  
  
$
23,575,294
  
  
$
23,575,294
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Cash equivalents and short-term investments represent the fair value of the Company's investment in four money markets and two short-term bond funds, respectively, as of May 31, 2012 and three money market accounts as of August 31, 2011. As of May 31, 2012, the fair value of the Company's common stock warrant liability decreased resulting primarily from decrease in warrants outstanding due to warrants exercised, offset by an increase in the Company's common stock price compared to the stock price as of August 31, 2011.
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 comprehensive loss.
For the three and nine months ended May 31, 2012 and 2011 and for the cumulative period from September 8, 2005 (inception) to May 31, 2012, 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 gain of approximately $6.9 million, losses of $5.0 million, $14.6 million, $18.6 million and $27.2 million, respectively, in the line item adjustment to fair value of common stock warrants in its condensed consolidated statements of comprehensive loss. See Note 9 for further discussion on the calculation of the fair value of the warrant liability. Below is the activity of the warrant liabilities (in millions):

 
 
 
 
 
 
 
 
 
 
  
Nine Month Periods Ended May 31,
 
 
  
2012
 
 
2011
 
Fair value of December 2009 direct offering warrants (including placement agent warrants) at beginning of the fiscal years
  
$
5.9
  
 
$
5.8
  
December 2009 direct offering warrants exercised
  
 
(4.8
)
 
 
(1.4
Adjustment to mark to market common stock warrants
  
 
2.1
  
 
 
7.1
 
 
  
 
 
 
 
 
 
 
December 2009 direct offering common stock warrant liability at fair value at May 31, 2012 and 2011
  
 
3.2
  
 
 
11.5
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Fair value of August 2010 private placement warrants (including broker warrants) at beginning of the fiscal years
  
 
17.7
  
 
 
9.9
  
August 2010 private placement warrants exercised
  
 
(4.7
)
 
 
-  
  
Adjustment to mark to market common stock warrants
  
 
2.9
  
 
 
11.5
 
 
  
 
 
 
 
 
 
 
August 2010 private placement common stock warrant liability at fair value at May 31, 2012 and 2011
  
 
15.9
  
 
 
21.4
  
 
  
 
 
 
 
 
 
 
Total warrant liability at May 31, 2012 and 2011
  
$
19.1
  
 
$
32.9
  
 
  
 
 
 
 
 
 
 
  (6) ACCRUED LIABILITIES
Accrued liabilities consisted of:
 
 
 
 
 
 
 
 
 
 
 
  
May 31,
2012
 
  
August 31,
2011
 
Clinical trial costs
  
$
1,304,985
  
  
$
1,177,859
  
Accrued vacation and employee benefits
  
 
360,686
  
  
 
142,678
  
Accrued bonuses
  
 
445,595
  
  
 
478,619
  
Salaries and wages
  
 
174,948
  
  
 
125,069
  
Legal fees
  
 
158,312
  
  
 
164,761
  
Consulting-general and administrative
  
 
152,141
  
  
 
18,085
  
Patent costs
  
 
96,523
  
  
 
2,969
  
Milestone fee
  
 
250,000
  
  
 
-  
  
Clinical trial materials
  
 
-  
  
  
 
125,256
  
Other
  
 
63,305
  
  
 
13,958
  
 
  
 
 
 
  
 
 
 
Total accrued liabilities
  
$
3,006,495
  
  
$
2,249,254
  
 
  
 
 
 
  
 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(7) 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 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 month periods ended May 31, 2012 and 2011 was $1,198,378 and $362,327, respectively. Employee stock-based compensation expense for the nine month periods ended May 31, 2012 and  2011, respectively, and for the cumulative period from September 8, 2005 (inception) to May 31, 2012 was $3,219,416, $1,541,888 and $6,570,778, respectively, of which cumulatively $5,261,406 was included in general and administrative expense and $1,309,372 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:
 
 
 
 
 
 
 
 
 
 
 
Period*
  
Risk-free
interest rate
 
 
  
Expected
life of stock
option
 
 
Annual
volatility
September 8, 2005 (inception) to August 31, 2006**
  
 
5
%
10 years
  
 
100
%
Year ended August 31, 2007
  
 
4 to 5
%
8 years
  
 
100
%
Year ended August 31, 2008
  
 
2 to 3.75
%
8 years
  
 
109 to 128
%
Year ended August 31, 2009
  
 
1.5 to 3.2
%
7 years
  
 
170 to 240
%
Year ended August 31, 2010
  
 
2.1 to 3.1
%
6 to 7 years
  
 
55 to 245
%
Year ended August 31, 2011
  
 
1.6 to 2.4
%
6 years
  
 
88 to 116
%
Three months ended November 30, 2011
  
 
1.2
%
6 years
  
 
121
%
Three months ended February 29, 2012
  
 
1.12
%
5 years
  
 
122
%
Three months ended May 31, 2012
  
 
0.89
%
5 years
  
 
124
%
 
*
Dividend rate is 0% for all periods presented.
**
Stock-based compensation expense was recorded on the condensed consolidated statements of operations and statements of comprehensive loss 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 and statements of comprehensive loss since inception.
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 May 31, 2012 and 2011 was $46,289 and $1,007, respectively. Stock-based compensation expense for consultants for the nine months ended May 31, 2012 and 2011 and for the cumulative period from September 8, 2005 (inception) to May 31, 2012 was $46,289, $38,016 and $729,611, respectively, of which cumulatively $147,295 was included in general and administrative expense and $582,316 was included in research and development expense.
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
  
 
2,231,790
  
 
$
3.39
  
  
 
834,624
  
  
$
2.54
  
Exercised
  
 
(39,302
)
 
$
2.44
  
  
 
-  
  
  
$
2.02
  
Canceled
  
 
(3,221
)
 
$
1,088.33
  
  
 
-  
  
  
$
-  
  
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
Outstanding at August 31, 2011
  
 
3,580,555
  
 
$
6.64
  
  
 
1,881,349
  
  
$
2.30
  
Granted
  
 
2,119,905
  
 
$
5.13
  
  
 
-  
  
  
$
4.45
  
Exercised
  
 
(17,485
)
 
$
2.27
  
  
 
-  
  
  
$
1.97
  
Canceled
  
 
(477
)
 
$
15.81
  
  
 
-  
  
  
$
0.05
  
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
Outstanding at November 30, 2011
  
 
5,682,498
  
 
$
6.09
  
  
 
2,051,680
  
  
$
3.14
  
Granted
  
 
190,000
  
 
$
6.87
  
  
 
-  
  
  
$
5.73
  
Exercised
  
 
(26,128
)
 
$
2.55
  
  
 
-  
  
  
$
1.96
  
Canceled
  
 
(4,522
)
 
$
429.54
  
  
 
-  
  
  
$
-  
  
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
Outstanding at February 29, 2012
  
 
5,841,848
  
 
$
5.80
  
  
 
2,222,773
  
  
$
3.25
  
Granted
  
 
345,015
  
 
$
6.01
  
  
 
-  
  
  
$
5.02
  
Exercised
  
 
(78,928
)
 
$
2.03
  
  
 
-  
  
  
$
1.49
  
Canceled
  
 
(12,500
)
 
$
6.96
  
  
 
-  
  
  
$
6.96
  
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
Outstanding at May 31, 2012
  
 
6,095,435
  
 
$
5.87
  
  
 
2,678,872
  
  
$
3.34
  
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The weighted-average intrinsic values of stock options outstanding and expected to vest and stock options exercisable as of May 31, 2012 and 2011 were approximately $8.5 million, $5.3 million, $7.8 million and $4.1 million, respectively (representing 6.1 million, 2.6 million, 3.3 million and 1.5 million shares, respectively).
There were 1,230,993 options available for grant as of May 31, 2012 under the 2010 Equity Incentive Plan, as amended (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 an increase 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 increase of 6,000,000 shares. The April 7 and August 31, 2011 replenishments added 1,629,516 and 1,778,459 shares, respectively, available 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. In September 2011, the Company's Board of Directors approved an amended and restated form of award agreement under the Plan, which will be used for awards granted on or after September 22, 2011. The amended and restated award agreement, subject to the terms of any applicable employment agreement, extends the termination date of the awards granted under the Plan that are vested as of such termination date due to (a) an employee's or a non-employee director's retirement at age 62 or older which employee or non-employee director has at least five (5) years of continuous service with the Company prior to such retirement, (b) the termination of a non-employee director's board membership for reasons other than for cause or retirement and (c) an employee's or a non-employee director's death (during his or her continuous service with the Company or within 90 days' of such continuous service with the Company) or permanent disability, to eighteen (18) months from the date of termination of continuous service with the Company. No further grants will be made under any previous or assumed stock option plans. As of May 31, 2012, 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
  
 
9,472
  
  
 
6.88
  
  
 
0.85
  
  
 
1,457
  
  
 
0.85
  
$1.01 to $2.00
  
 
81,735
  
  
 
7.03
  
  
 
1.76
  
  
 
70,068
  
  
 
1.74
  
$2.01 to $3.00
  
 
1,465,586
  
  
 
6.34
  
  
 
2.65
  
  
 
1,077,895
  
  
 
2.59
  
$3.01 to $4.00
  
 
1,765,023
  
  
 
9.54
  
  
 
3.50
  
  
 
983,702
  
  
 
3.53
  
$4.01 to $5.00
  
 
87,412
  
  
 
7.77
  
  
 
4.58
  
  
 
86,172
  
  
 
4.71
  
$5.01 to $6.00
  
 
2,294,905
  
  
 
9.36
  
  
 
5.16
  
  
 
408,291
  
  
 
5.13
  
$6.01 to $7.00
  
 
277,515
  
  
 
9.76
  
  
 
6.48
  
  
 
7,500
  
  
 
6.67
  
$7.01 to $8.00
  
 
70,000
  
  
 
9.71
  
  
 
7.75
  
  
 
-
  
  
 
-
  
$8.01 to $964.24
  
 
43,787
  
  
 
3.29
  
  
 
249.94
  
  
 
43,787
  
  
 
249.94
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
  
 
6,095,435
  
  
 
8.36
  
  
 
5.87
  
  
 
2,678,872
  
  
 
7.42
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
At May 31, 2012, the total unrecognized compensation cost was approximately $12.1 million. The weighted-average period over which it is expected to be recognized is 3 years.
RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(8) ISSUANCE OF COMMON STOCK
As of May 31, 2012, there were 49,086,807 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 month periods ended May 31, 2012, the Company received approximately $237,000 and $5.0 million from the exercise of warrants in exchange for the issuance of approximately 90,000 and 1.8 million shares of the Company's common stock respectively. During the cumulative period from September 8, 2005 (inception) through May 31, 2012, the Company received approximately $20.9 million from the exercise of warrants in exchange for the issuance of an aggregate of 6.9 million shares.
During the three and nine month periods ended May 31, 2012, the Company received approximately $160,000 and $266,000 from the exercise of stock options in exchange for the issuance of approximately 79,000  and 123,000  shares of the Company's common stock, respectively. For the cumulative period from September 8, 2005 (inception) through May 31, 2012, the Company received approximately $435,000 from the exercise of stock options resulting in the issuance of approximately 203,000 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 clinical development. 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 (referred to as Convivia™). 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 Convivia™. 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 Convivia™ pursuant to the asset purchase agreement.
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 Convivia™ in Taiwan. As discussed above, in aggregate, the Company has issued to Mr. Daley 58,280 shares of Raptor's common stock valued at $118,551 and paid $70,000 in cash bonuses related to Convivia™ milestones along with another $20,000 in cash bonuses related to employment milestones pursuant to Mr. Daley's employment agreement. 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 under research and development expenses in the amount of $240,625 on its consolidated statement of operations for the year ended August 31, 2008.
 

RAPTOR PHARMACEUTICAL CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
MERGER OF RAPTOR THERAPEUTICS INC. 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 subsidiary, Raptor Therapeutics Inc. 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 Raptor Therapeutics Inc. 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, Raptor Therapeutics Inc., 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 option holders of Encode (the "Encode Option Holders"), and warrants ("Company Warrants") to purchase 256,034 restricted, unregistered shares of Common Stock to the warrant holders of Encode (the "Encode Warrant Holders", and together with the Encode Stockholders and Encode Option Holders, the "Encode Security Holders"), 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 security holders as of the closing of the merger with Encode. The purchase price was valued at $2.6 million, which was 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 Security Holders 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 RP103/RP104, 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 RP103/RP104 (the "License Agreement"), developed by clinical scientists at the UCSD, School of Medicine. RP103/RP104 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 RP103/RP104 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 $930,000 in milestone payments to UCSD based upon the initiation of clinical trials in cystinosis, Huntington's Disease and NASH and on regulatory filings in cystinosis.  In March 2012, the Company filed its Marketing Authorization Application ("MAA") with the European Medicines Agency ("EMA"), as well as its New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA"), for RP103 for the potential treatment of cystinosis. In conjunction with the achievement of MAA/NDA filing milestone, the Company paid $250,000 to UCSD pursuant to this license.  Future milestones of $500,000 and $750,000 will be payable if the MAA and NDA for cystinosis are approved, respectively, which the Company anticipates may occur in the first half of calendar 2013.
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 PRIVATE PLACEMENTS
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 $10.0 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 $3.0 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 served 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.

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 clinical development and Patrice P. Rioux., M.D., Ph.D., as Chief Medical Officer of clinical development.
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 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
 
 
%
 
Cash and equivalents
  
$
0.58
  
 
 
13
  
Other current assets
  
 
0.10
  
 
 
2
  
Accrued liabilities
  
 
(0.68
)
 
 
(15
)
Intangible assets:
  
 
 
 
 
 
 
 
In-process research and development