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
November 30,
2009
 [
              ]
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
  ACT
 For the
transition period from _________ to __________
 
 Commission
file number 000-25571
 
 Raptor
      Pharmaceutical Corp.(Exact
      name of registrant as specified in its charter)Delaware
              
              86-0883978(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)
 
 9
      Commercial Blvd., Suite 200, Novato, CA 94949(Address
      of principal executive offices)
 
 (415)
      382-8111(Registrant’s
      telephone number, including area
code)
 
 TorreyPines
      Therapeutics, Inc., P.O. Box 231386, Encinitas, CA  92023-1386,
      December 31(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X]     No
[  ]
 
 Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate website, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).     Yes  [  ] 
  No   [X ]
  Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
  Large
      accelerated filer   [  ]
              
              
              
              Accelerated
      filer    [  ]Non-accelerated
      filer    [  ]  (Do not check if a
      smaller reporting company)
              
              Smaller
      reporting company    [ X
]
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  [ ]  No [X]
 
 There were 22,579,515 shares of the
registrant’s common stock, $.001 par value per share, outstanding at January 11,
2010.
  
  
 RAPTOR
PHARMACEUTICAL CORP.
 
 Table
of Contents
 PagePart 1 - Financial
    InformationItem
      1
              Financial
      StatementsCondensed
      Consolidated Balance Sheets as of November 30, 2009 (unaudited) and August
      31, 2009
              2Unaudited
      Condensed Consolidated Statements of Operations for the three month
      periods ended November 30, 2009 and 2008 and the cumulative period from
      September 8, 2005 (inception) to November 30, 2009
              3Unaudited
      Condensed Consolidated Statements of Cash Flows for the three month
      periods ended November 30, 2009 and 2008 and the cumulative period from
      September 8, 2005 (inception) to November 30, 2009
              5Notes
      to Condensed Consolidated Financial Statements
              6Item
      2
              Management’s
      Discussion and Analysis and Results  of
    Operations
              27Item
      3
              Quantitative
      and Qualitative Disclosures About Market Risk
              46Item
      4
              Controls
      and Procedures
              46Part II - Other
  InformationItem
      1
              Legal
      Proceedings
              47Item
      1A
              Risk
      Factors
              47Item
      2
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              65Item
      3
              Defaults
      Upon Senior Securities
              65Item
      4
              Submission
      of Matters to a Vote of Security Holders
              65Item
      5
              Other
      Information
              65Item
      6
              Exhibits
              65SIGNATURES
              67
 
  
  
  PART
I – FINANCIAL INFORMATION
  Item
1. Financial Statements.
 
 Raptor
      Pharmaceutical Corp.(A
      Development Stage Company)Condensed
      Consolidated Balance SheetsNovember
      30, 2009
              
              August
      31, 2009ASSETS
              
              (unaudited)
              
              (1)Current
      assets:Cash
      and cash equivalents
              
              $
              1,164,808
              
              $
              3,701,787Prepaid
      expenses and other
              
              
              231,958
              
              
              107,054Total
      current assets
              
              
              1,396,766
              
              
              3,808,841Intangible
      assets, net
              
              
              3,627,667
              
              
              2,524,792Goodwill
              
              
              
              3,275,403
              
              
              -Fixed
      assets, net
              
              
              
              130,868
              
              
              144,735Deposits
              
              
              
              100,206
              
              
              100,206Total
      assets
              
              $
              8,530,910
              
              $
              6,578,574LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesCurrent
      liabilities:Accounts
      payable
              
              $
              1,102,197
              
              $
              613,577Accrued
      liabilities
              
              
              844,282
              
              
              451,243Deferred
      rent
              
              
              
              496
              
              
              -Capital
      lease liability – current
              
              
              4,292
              
              
              4,117Total
      current liabilities
              
              
              1,951,267
              
              
              1,068,937Capital
      lease liability - long-term
              
              
              5,535
              
              
              6,676Total
      liabilities
              
              
              
              1,956,802
              
              
              1,075,613Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.001 par value, 15,000,000 shares authorized, zero shares issued
      and        outstanding
              
              
              -
              
              
              -Common
      stock, $0.001 par value, 150,000,000 shares authorized 18,831,957 and
      17,857,555 shares issued and outstanding as at November 30, 2009
      andAugust
      31, 2009, respectively
              
              
              18,832
              
              
              17,858Additional
      paid-in capital
              
              
              31,373,131
              
              
              27,364,286Deficit
      accumulated during development stage
              
              
              (24,817,855)
              
              
              (21,879,183)Total
      stockholders’ equity
              
              
              6,574,108
              
              
              5,502,961Total
      liabilities and stockholders’ equity
              
              $
              8,530,910
              
              $
              6,578,574(1)
      Derived from the Company’s audited consolidated financial statements as of
      August 31, 2009.The
      accompanying notes are an integral part of these financial
      statements.
 
 
 
 
 
 
 -2-
  
  
 Raptor
      Pharmaceutical Corp.(A
      Development Stage Company)Condensed
      Consolidated Statements of Operations(Unaudited)For
      the three month periods from September 1, to November
  30,2009
              
              2008Revenues:
              $
              -
              
              $
              -Operating
      expenses:General
      and administrative
              
              1,010,076
              
              
              659,689Research
      and development
              
              1,930,836
              
              
              1,820,400Total
      operating expenses
              
              2,940,912
              
              
              2,480,089Loss
      from operations
              
              (2,940,912)
              
              
              (2,480,089)Interest
      income
              
              3,265
              
              
              21,777Interest
      expense
              
              (1,025)
              
              
              (686)Net
      loss
              $
              (2,938,672)
              
              $
              (2,458,998)Net
      loss per share:Basic
      and diluted
              $
              (0.16)
              
              $
              (0.17)Weighted
      average sharesoutstanding
      used to compute:Basic
      and diluted
              
              18,520,579
              
              
              14,074,849The
      accompanying notes are an integral part of these financial
      statements.-3-
 
 
 
 
 Raptor
      Pharmaceutical Corp.(A
      Development Stage Company)Condensed
      Consolidated Statements of Operations(Unaudited)For
      the cumulative period from September 8, 2005 (inception) to November 30,
      2009Revenues:
              
              $
              -Operating
      expenses:General
      and administrative
              
              
              7,966,316Research
      and development
              
              
              16,805,120In-process
      research and development
              
              
              240,625Total
      operating expenses
              
              
              25,012,061Loss
      from operations
              
              
              (25,012,061)Interest
      income
              
              
              305,168Interest
      expense
              
              
              (110,962)Net
      loss
              
              $
              (24,817,855)The
      accompanying notes are an integral part of these financial
      statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -4-
  
  
 Raptor
      Pharmaceutical Corp.(A
      Development Stage Company)Condensed
      Consolidated Statements of Cash Flows(unaudited)For
      the three month periods from
              
              For
      the cumulative period from September 8, 2005September
      1, 2009 to November 30, 2009
              
              September
      1, 2008 to November 30, 2008
              (inception)
      to November 30, 2009Cash
      flows from operating activities:Net
      loss
              
              $
              (2,938,672)
              
              $
              (2,458,998)
              
              $
              (24,713,460)Adjustments
      to reconcile net loss to net cash used in operating
      activities:Employee
      stock-based compensation exp.
              
              
              25,803
              
              
              116,518
              
              
              1,240,830Consultant
      stock-based compensation exp.
              
              
              65,200
              
              
              12,993
              
              
              472,813Amortization
      of intangible assets
              
              
              37,124
              
              
              34,626
              
              
              282,332Depreciation
      of fixed assets
              
              
              17,169
              
              
              21,996
              
              
              368,110In-process
      research and development
              
              
              -
              
              
              -
              
              
              240,625Amortization
      of capitalized finder’s fee
              
              
              -
              
              
              -
              
              
              102,000Capitalized
      acquisition costs previously expensed
              
              
              -
              
              
              -
              
              
              38,000Changes
      in assets and liabilities:Prepaid
      expenses and other
              
              
              (124,903)
              
              
              (79,560)
              
              
              (132,519)Intangible
      assets
              
              
              -
              
              
              -
              
              
              (150,000)Deposits
              
              
              -
              
              
              -
              
              
              (100,207)Accounts
      payable
              
              
              488,620
              
              
              74,158
              
              
              1,102,197Accrued
      liabilities
              
              
              (393,040)
              
              
              29,080
              
              
              59,161Deferred
      rent
              
              
              496
              
              
              91
              
              
              391Net
      cash used in operating activities
              
              
              (2,617,518)
              
              
              (2,249,096)
              
              
              (21,189,727)Cash
      flows from investing activities:Purchase
      of fixed assets
              
              
              (3,303)
              
              
              (3,592)
              
              
              (479,653)Cash
      acquired in 2009 Merger
              
              
              581,395
              
              
              -
              
              
              581,394Net
      cash from investing activities
              
              
              578,092
              
              
              (3,592)
              
              
              101,741Cash
      flows from financing activities:Proceeds
      from the sale of common stock
              
              
              -
              
              
              -
              
              
              17,386,000Proceeds
      from the exercise of common stock warrants
              
              
              56,020
              
              
              -
              
              
              6,565,520Proceeds
      from the exercise of common stock options
              
              
              4,750
              
              
              -
              
              
              13,448Fundraising
      costs
              
              
              (557,358)
              
              
              (20,296)
              
              
              (2,012,679)Proceeds
      from the sale of common stock to initial investors
              
              
              -
              
              
              -
              
              
              310,000Proceeds
      from bridge loan
              
              
              -
              
              
              -
              
              
              200,000Repayment
      of bridge loan
              
              
              -
              
              
              -
              
              
              (200,000)Principal
      payments on capital lease
              
              
              (965)
              
              
              (770)
              
              
              (9,495)Net
      cash provided by (used in) financing activities
              
              
              (497,553)
              
              
              (21,066)
              
              
              22,252,794Net
      increase (decrease) in cash and cash equivalents
              
              
              (2,536,979)
              
              
              (2,273,754)
              
              
              1,164,808Cash
      and cash equivalents, beginning of period
              
              
              3,701,787
              
              
              7,546,912
              
              
              -Cash
      and cash equivalents, end of period
              
              $
              1,164,808
              
              $
              5,273,158
              
              $
              1,164,808Supplemental
      disclosure of non-cash financing activities:Common
      stock and warrants issued in connection with reverse
merger
              
              $
              4,415,403
              
              $
              -
              
              $
              4,415,403Acquisition
      of equipment in exchange for capital lease
              
              $
              -
              
              $
              14,006
              
              $
              21,403Notes
      receivable issued in exchange for common stock
              
              $
              -
              
              $
              -
              
              $
              110,000Common
      stock issued for a finder’s fee
              
              $
              -
              
              $
              -
              
              $
              102,000Common
      stock issued in asset purchase
              
              $
              -
              
              $
              -
              
              $
              2,898,624The
      accompanying notes are an integral part of these financial
      statements.-5-
 RAPTOR
PHARMACEUTICAL CORP.
 (A
Development Stage Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (1)
NATURE OF OPERATIONS AND BUSINESS RISKS
 
 The
accompanying condensed consolidated financial statements reflect the results of
operations of Raptor Pharmaceutical Corp. (the “Company” or “Raptor”) and have
been prepared in accordance with the accounting principles generally accepted in
the United States of America.
  On July 28, 2009, the Company and ECP
Acquisition, Inc., a Delaware corporation, the Company’s then-wholly-owned
subsidiary, herein referred to as merger sub, entered into an Agreement and Plan
of Merger and Reorganization, herein referred to as the 2009 Merger Agreement,
with Raptor Pharmaceuticals Corp. (“RPC”), a Delaware corporation. On September
29, 2009, on the terms and subject to the conditions set forth in the 2009
Merger Agreement, pursuant to a stock-for-stock reverse triangular merger,
herein referred to as the 2009 Merger, merger sub was merged with and into
Raptor Pharmaceuticals Corp. and Raptor Pharmaceuticals Corp. survived such 2009
Merger as the Company’s wholly-owned subsidiary. Immediately prior to such 2009
Merger and in connection therewith, the Company effected a 1-for-17 reverse
stock split of its common stock and changed its corporate name from “TorreyPines
Therapeutics, Inc.” to “Raptor Pharmaceutical Corp.”
  As a result of the 2009 Merger and in
accordance with the 2009 Merger Agreement, each share of Raptor Pharmaceuticals
Corp.’s common stock outstanding immediately prior to the effective time of the
2009 Merger was converted into the right to receive 0.2331234 shares of our
common stock, on a post 1-for-17 reverse-split basis. Each option and warrant to
purchase Raptor Pharmaceuticals Corp.’s common stock outstanding immediately
prior to the effective time of the 2009 Merger was assumed by the Company at the
effective time of the 2009 Merger, with each share of such common stock
underlying such options and warrants being converted into the right to receive
0.2331234 shares of the Company’s common stock, on a post 1-for-17 reverse split
basis, rounded down to the nearest whole share of the Company’s common stock.
Following the 2009 Merger, each such option or warrant has an exercise price per
share of the Company’s common stock equal to the quotient obtained by dividing
the per share exercise price of such common stock subject to such option or
warrant by 0.2331234, rounded up to the nearest whole cent.
  Immediately following the effective
time of the 2009 Merger, Raptor Pharmaceuticals Corp.’s (as of immediately prior
to the 2009 Merger) stockholders owned approximately 95% of the Company’s
outstanding common stock and the Company’s (as of immediately prior to the 2009
Merger) stockholders owned approximately 5% of the Company’s outstanding common
stock.
  Raptor Pharmaceuticals Corp., the
Company’s wholly-owned subsidiary, was the “accounting acquirer,” and for
accounting purposes, the Company was deemed as having been “acquired” in the
2009 Merger.  The board of directors and officers that managed and
operated Raptor Pharmaceuticals Corp. immediately prior to the effective time of
the 2009 Merger became the Company’s board of directors and
officers.  Additionally, following the effective time of the 2009
Merger, the business conducted by Raptor Pharmaceuticals Corp. immediately prior
to the effective time of the 2009 Merger became primarily the business conducted
by the Company.
  The
following reflects the Company’s current, post 2009 Merger corporate structure
(incorporation State):
  Raptor
Pharmaceutical Corp., formerly TorreyPines Therapeutics, Inc.
(Delaware)
  |                                                    |
  TPTX,
Inc.
(Delaware)                                                      Raptor
Pharmaceuticals Corp. (Delaware)
  |                                        |
  Raptor Therapeutics Inc.
(Delaware)   Raptor Discoveries Inc. (Delaware)
 (f/k/a  Bennu
Pharmaceuticals
Inc.)                                                                     (f/k/a
Raptor Pharmaceutical Inc.)
 
 Raptor is a publicly-traded
biotechnology company dedicated to speeding the delivery of new treatment
options to patients by enhancing existing therapeutics through the application
of highly specialized drug targeting platforms and formulation expertise. The
Company focuses on underserved patient populations where it can have the
greatest potential impact. Raptor’s preclinical division bioengineers novel drug
candidates and drug-targeting platforms derived from the human
receptor-associated protein (“RAP”) and related proteins, while Raptor’s
clinical
 
 
 
 
 -6-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A
Development Stage Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 division
advances clinical-stage product candidates towards marketing approval and
commercialization. Raptor’s clinical programs include DR Cysteamine for the
potential treatment of nephropathic cystinosis, non-alcoholic steatohepatitis
(“NASH”), and Huntington’s Disease. Raptor also has two clinical stage product
candidates in which the Company is seeking to out-license or form a development
partnership: ConviviaTM for
the potential treatment of aldehyde dehydrogenase (“ALDH2”) deficiency; and
Tezampanel and NGX426, a non-opioid solution designed to treat chronic pain.
Raptor’s preclinical programs target cancer, neurodegenerative disorders and
infectious diseases. HepTideTM is designed to utilize engineered RAP-based
peptides conjugated to drugs to target delivery to the liver to potentially
treat primary liver cancer and hepatitis. NeuroTransTM represents engineered RAP
peptides created to target receptors in the brain and are currently, in
collaboration with Roche, undergoing preclinical evaluation for their ability to
enhance the transport of therapeutics across the blood-brain barrier. WntTideTM
is based upon Mesd and Mesd peptides that the Company is studying in a
preclinical breast cancer model for WntTideTM’s potential inhibition of Wnt
signaling through LRP5, which may block cancers dependent on signaling through
LRP5 or LRP6. Raptor is also examining Tezampanel and NGX426, for the treatment
of thrombotic disorder. The Company’s fiscal year end is August 31.
 
 The Company is subject to a number of
risks, including: the need to raise capital through equity and/or debt
financings; the uncertainty whether the Company’s research and development
efforts will result in successful commercial products; competition from larger
organizations; reliance on licensing proprietary technology of others;
dependence on key personnel; uncertain patent protection; and dependence on
corporate partners and collaborators.
 
 See the
section titled “Risk Factors” in Part II Item 1A of this Quarterly Report on
Form 10-Q.
  (2)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (a)
Basis of Presentation
 
 The Company’s condensed consolidated
financial statements include the accounts of the Company’s wholly owned
subsidiaries, Raptor Pharmaceuticals Corp., Raptor Discoveries Inc., Raptor
Therapeutics Inc., and TPTX, Inc. incorporated in Delaware on May 5, 2006,
September 8, 2005 (date of inception), August 1, 2007, and April 24, 2000,
respectively. All inter-company accounts have been eliminated. The Company’s
condensed consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. Through
November 30, 2009, the Company had accumulated losses of approximately $24.8
million. Management expects to incur further losses for the foreseeable future.
Management believes that the Company’s cash and cash equivalents at November 30,
2009 along with the net funds raised subsequent to quarter-end in December 2009
of approximately $6.9 million (see the subsequent event Note 12) will be
sufficient to meet the Company’s obligations into the third calendar quarter of
2010. The Company is currently in the process of negotiating strategic
partnerships and collaborations in order to fund its preclinical and clinical
programs into 2011. If the Company is not able to close a strategic transaction,
the Company anticipates raising additional capital in the second calendar
quarter of 2010. If the Company is not able to obtain funds either through a
strategic transaction or through the sale of its equity, it may not be able to
continue as a going concern.  Until the Company can generate
sufficient levels of cash from its operations, the Company expects to continue
to finance future cash needs primarily through proceeds from equity or debt
financings, loans and collaborative agreements with corporate partners or
through a business combination with a company that has such financing in order
to be able to sustain its operations until the Company can achieve profitability
and positive cash flows, if ever.
 
 On September 29, 2009, upon the closing
of the merger with RPC (as discussed further in the Note 9, Issuance of Common
Stock), RPC’s stockholders exchanged each share of RPC’s common stock into
..2331234 shares of the post-merger company and the exercise prices and stock
prices were divided by .2331234 to reflect the post-merger equivalent stock
prices and exercise prices. Therefore, all shares of common stock and exercise
prices of common stock options and warrants are reported in these condensed
consolidated financial statements on a post-merger basis.
 
 The Company’s independent registered
public accounting firm has audited our consolidated financial statements for the
years ended August 31, 2009 and 2008. The October 27, 2009 audit opinion
included a paragraph indicating substantial doubt as to the Company’s ability to
continue as a going concern due to the fact that the Company is in the
development stage and has not generated any revenue to date.
 
 
 
 -7-
  RAPTOR
PHARMACEUTICAL CORP.
 (A
Development Stage Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 Management plans to seek additional
debt and/or equity financing for the Company through private or public offerings
or through a business combination or strategic partnership, but it cannot assure
that such financing or transaction will be available on acceptable terms, or at
all. The uncertainty of this situation raises substantial doubt about the
Company’s ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from the
failure to continue as a going concern.
  (b) Use of
Estimates
  The preparation of financial statements
in conformity with United States generally accepted accounting principles
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities as of the dates of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
  (c) Fair Value of Financial
Instruments
 
 The carrying amounts of certain of the
Company’s financial instruments including cash and cash equivalents, prepaid
expenses, accounts payable, accrued liabilities and capital lease liability
approximate fair value due to their short maturities.
  (d) Segment
Reporting
 
 The Company has determined that it
operates in two operating segments, preclinical development and clinical
development. Operating segments are components of an enterprise for which
separate financial information is available and are evaluated regularly by the
Company in deciding how to allocate resources and in assessing performance. The
Company’s chief executive officer assesses the Company’s performance and
allocates its resources. Below is a break-down of the Company’s net loss and
total assets by operating segment:
 For
      the three month period ended November 30,2009
              
              
              2008Preclinical
              
              
              Clinical
              
              
              Total
              
              
              Preclinical
              
              
              Clinical
              
              
              TotalNet
      loss
              
              $
              (949,726)
              
              
              $
              (1,988,946)
              
              
              $
              (2,938,672)
              
              
              $
              (796,343)
              
              
              $
              (1,662,655)
              
              
              $
              (2,458,998)Total
      assets
              
              
              498,524
              
              
              
              8,032,386
              
              
              
              8,530,910
              
              
              
              1,463,910
              
              
              
              6,921,564
              
              
              
              8,385,474
 
 (e) Cash and Cash
Equivalents
  The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
  (f) Intangible
Assets
 
 Intangible assets include the
intellectual property and other rights relating to DR Cysteamine, to the RAP
technology and to the out-license and the rights to NGX 426 acquired in the 2009
Merger. The intangible assets related to DR Cysteamine and the RAP technology
are amortized using the straight-line method over the estimated useful life of
20 years, which is the life of the intellectual property patents. The 20 year
estimated useful life is also based upon the typical development, approval,
marketing and life cycle management timelines of pharmaceutical drug
products.  The intangible assets related to the out-license will be
amortized using the straight-line method over the estimated useful life of 16
years, which is the life of the intellectual property patents. The intangible
assets related to NGX 426, which has been classified as in-process research and
development, will not be amortized until development is completed.
  (g) Goodwill
  Goodwill represents the excess of the
value of the purchase consideration over the identifiable assets acquired in the
2009 Merger.  Goodwill will be reviewed annually, or when an
indication of impairment exists, to determine if any impairment analysis and
resulting write-down in valuation is necessary.
  (h) Fixed Assets
 
 Fixed assets, which mainly consist of
leasehold improvements, lab equipment, computer hardware and software and
capital lease equipment, are stated at cost. Depreciation is computed using the
straight-line method over the related estimated
 -8-
 
 
 RAPTOR
PHARMACEUTICAL CORP.
 (A
Development Stage Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 useful
lives, except for leasehold improvements and capital lease equipment, which are
depreciated over the shorter of the useful life of the asset or the lease term.
Significant additions and improvements that have useful lives estimated at
greater than one year are capitalized, while repairs and maintenance are charged
to expense as incurred.
  (i) Impairment of Long-Lived
Assets
 
 The Company evaluates its long-lived
assets for indicators of possible impairment by comparison of the carrying
amounts to future net undiscounted cash flows expected to be generated by such
assets when events or changes in circumstances indicate the carrying amount of
an asset may not be recoverable. Should an impairment exist, the impairment loss
would be measured based on the excess carrying value of the asset over the
asset’s fair value or discounted estimates of future cash flows. The Company has
not identified any such impairment losses to date.
  (j) Income Taxes
 
 Income taxes are recorded under the
liability method, under which deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
  (k) Research and
Development
  The Company is an early development
stage company. Research and development costs are charged to expense as
incurred. Research and development expenses include scientists’ salaries, lab
collaborations, preclinical studies, clinical trials, clinical trial materials,
regulatory and clinical consultants, lab supplies, lab services, lab equipment
maintenance and small equipment purchased to support the research laboratory,
amortization of intangible assets and allocated executive, human resources and
facilities expenses.
  (l) In-Process Research and
Development
 
 Prior to September 1, 2009, the Company
recorded in-process research and development expense for a product candidate
acquisition where there is not more than one potential product or usage for the
assets being acquired. Upon the adoption of the revised guidance on business
combinations, effective September 1, 2009, the fair value of acquired in-process
research and development is capitalized and tested for impairment at least
annually.  Upon completion of the research and development activities,
the intangible asset is amortized into earnings over the related products useful
life. The Company reviews each product candidate acquisition to determine the
existence of in-process research and development.
  (m) Net Loss per
Share
 
 Net loss per share is calculated by
dividing net loss by the weighted average shares of common stock outstanding
during the period. Diluted net income per share is calculated by dividing net
income by the weighted average shares of common stock outstanding and potential
shares of common stock during the period. For all periods presented, potentially
dilutive securities are excluded from the computation of fully diluted net loss
per share as their effect is anti-dilutive. Potentially dilutive securities
include:
 
 November
      30,2009
              
              
              2008Warrants
      to purchase common stock
              
              
              2,020,793
              
              
              
              3,090,814Options
      to purchase common stock
              
              
              1,196,163
              
              
              
              925,087Total
      potentially dilutive securities
              
              
              3,216,956
              
              
              
              4,015,901
 (n) Stock Option
Plan
 
 Effective September 1, 2006, the
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 718, Accounting for Compensation
Arrangements, (“ASC 718”) (previously listed as SFAS No. 123
(revised 2004)), Share-Based
Payment. in accounting for its 2006 Equity Incentive Plan, as
amended.
 
 -9-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A
Development Stage Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 Under ASC 718,
compensation cost is measured at the grant date based on the fair value of the
equity instruments awarded and is recognized over the period during which an
employee is required to provide service in exchange for the award, or the
requisite service period, which is usually the vesting period. The fair value of
the equity award granted is estimated on the date of the grant. The Company
previously applied Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and provided the required pro
forma disclosures required by SFAS No. 123, Accounting for Stock-Based
Compensation. The Company accounts for stock options issued to third
parties, including consultants, in accordance with the provisions of the FASB
ASC Topic 505-50, Equity-Based
Payments to Non-Employees, (“ASC 505-50”) (previously listed as Emerging
Issues Task Force (“EITF”) Consensus No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services). See Note 8, Stock Option Plan, for further
discussion of employee stock-based compensation.
  (o) Recent Accounting
Pronouncements
 
 In September 2006, ASC Topic 820, Fair Value Measurements (“ASC
820”) (previously listed as the FASB issued SFAS No. 157, Fair Value Measurements). ASC
820 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. ASC 820 does not require any new fair
value measurements; rather, it applies under other accounting pronouncements
that require or permit fair value measurements. The provisions of ASC 820 are to
be applied prospectively as of the beginning of the fiscal year in which it is
initially applied, with any transition adjustment recognized as a
cumulative-effect adjustment to the opening balance of retained earnings. The
provisions of ASC 820 are effective for fiscal years beginning after November
15, 2007; therefore, the Company adopted ASC 820 as of September 1, 2008 for
financial assets and liabilities. In accordance with FASB Staff Position 157-2,
Effective Date of ASC 820, the Company adopted  the provisions of ASC
820 for its non-financial assets and non-financial liabilities on September 1,
2009 and has determined that it had no material impact on the Company’s results
for the three months ended November 30, 2009. See Note 5, Fair Value
Measurements, regarding the disclosure of the Company’s value of its cash
equivalents.
 
 In February 2007, the FASB issued ASC
Topic 825, Financial
Instruments, (“ASC 825”) (previously SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement No.
115),which
permits the measurement of many financial instruments and certain other asset
and liabilities at fair value on an instrument-by-instrument basis (the fair
value option). The guidance is applicable for fiscal years beginning after
November 15, 2007; therefore, the Company adopted ASC 825 as of September 1,
2008. The Company has determined that ASC 825 had no material
impact  on its financial results for the three months ended November
30, 2009.
 
 In June 2007, the EITF reached a
consensus on ASC Topic 730, Research and Development,
(“ASC 730”) (previously EITF No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities). ASC 730 specifies the timing of expense recognition for
non-refundable advance payments for goods or services that will be used or
rendered for research and development activities. ASC 730 was effective for
fiscal years beginning after December 15, 2007, and early adoption is not
permitted; therefore, the Company adopted ASC 730 as of September 1, 2008. The
Company has determined that ASC 730 had no material impact on its financial
results for the three months ended November 30, 2009.
 
 In December 2007, the EITF reached a
consensus on ASC Topic 808, Collaborative Agreement,
(“ASC 808”) (previously EITF 07-01, Accounting for Collaborative
Arrangements).  ASC 808 discusses the appropriate income
statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and
commercialization of intellectual property. The sufficiency of disclosure
related to these arrangements is also specified. ASC 808 is effective for fiscal
years beginning after December 15, 2008. As a result, ASC 808 is effective for
the Company as of September 1, 2009.  Based upon the nature of the
Company’s business, ASC 808 could have a material impact on its financial
position and consolidated results of operations in future years, but had no
material impact for the three months ended November 30, 2009.
 
 In December 2007, FASB issued ASC Topic
805, Business
Combinations, (“ASC 805”) (previously SFAS 141(R) and FASB ASC Topic 810,
Consolidation (“ASC
810”) (previously SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51). 
These statements will significantly change the financial accounting and
reporting of business combination transactions and non-controlling (or minority)
interests in consolidated financial statements. ASC 805 requires companies to:
(i) recognize, with certain exceptions, 100% of the fair values of assets
acquired, liabilities assumed, and non-controlling interests in acquisitions of
less than a 100% controlling interest when the acquisition constitutes a change
in control of the acquired entity; (ii) measure acquirer shares issued in
consideration for a business combination at fair value on the
 
 -10-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A
Development Stage Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 acquisition
date; (iii) recognize contingent consideration arrangements at their
acquisition-date fair values, with subsequent changes in fair value generally
reflected in earnings; (iv) with certain exceptions, recognize pre-acquisition
loss and gain contingencies at their acquisition-date fair values; (v)
capitalize in-process research and development (“IPR&D”) assets acquired;
(vi) expense, as incurred, acquisition-related transaction costs; (vii)
capitalize acquisition-related restructuring costs only if the criteria in ASC
420, Exit and Disposal Cost
Obligations, (previously SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities), are met as of the acquisition date; and
(viii) recognize changes that result from a business combination transaction in
an acquirer’s existing income tax valuation allowances and tax uncertainty
accruals as adjustments to income tax expense. ASC 805 is required to be adopted
concurrently with ASC 810 and is effective for business combination transactions
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008 (the Company’s fiscal
2010). Early adoption of these statements is prohibited. The Company believes
the adoption of these statements will have a material impact on significant
acquisitions completed after September 1, 2009.   See Note 9
which reflects the accounting treatment of our 2009 Merger utilizing these
provisions.
 
 In March 2008, the FASB issued ASC
Topic 815, Derivatives and
Hedging, (“ASC 815”) (previously SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities). This statement will require enhanced
disclosures about derivative instruments and hedging activities to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company adopted ASC 815 on December 1,
2008 and has determined that ASC 815 had no material impact on its financial
results for the three months ended November 30, 2009.
 
 In May 2008, the FASB released ASC
Topic 470, Debt, (“ASC
470”) (previously FASB Staff Position (“FSP”) APB 14-1 Accounting For Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) that alters the accounting treatment for convertible debt
instruments that allow for either mandatory or optional cash settlements. ASC
470 specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. Furthermore, it would require recognizing interest expense
in prior periods pursuant to retrospective accounting treatment. FSP ASC 470 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008; therefore, the Company adopted ASC 470 as of September 1,
2009. The Company has determined that ASC 470 had no material impact on its
condensed consolidated financial statements for the three months ended November
30, 2009.
 
 In June 2008, the FASB issued FASB ASC
Topic 815, Derivatives and
Hedging, (“ASC 815”) (previously EITF 07-5, Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own
Stock).  ASC 815 requires entities to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock by assessing the instrument’s contingent exercise provisions and
settlement provisions. Instruments not indexed to their own stock fail to meet
the scope exception of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, paragraph 11(a), and should be
classified as a liability and marked-to-market. The statement is effective for
fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years and is to be applied to outstanding instruments upon adoption with
the cumulative effect of the change in accounting principle recognized as an
adjustment to the opening balance of retained earnings. The Company adopted ASC
815 as of September 1, 2009 and has determined that ASC 815 had no material
impact on its condensed consolidated financial statements for the three months
ended November 30, 2009.
 
 In April 2008, the FASB issued ASC
Topic 350, Intangibles –
Goodwill and Other, (“ASC 350”) (previously FSP SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets). ASC 350 provides guidance with respect to estimating
the useful lives of recognized intangible assets acquired on or after the
effective date and requires additional disclosure related to the renewal or
extension of the terms of recognized intangible assets. ASC 350 is effective for
fiscal years and interim periods beginning after December 15, 2008. The Company
adopted ASC 350 as of September 1, 2009 and has determined that ASC 350 had no
material impact on the Company’s condensed consolidated financial statements for
the three months ended November 30, 2009.
 
 
 
 
 
 
 
 
 
 
 -11-
  
  
 RAPTOR
PHARMACEUTICAL CORP.
 (A
Development Stage Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 In May 2009, the FASB issued ASC Topic
855, Subsequent Events,
(“ASC 855”) (previously SFAS No. 165, Subsequent Events). ASC 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. ASC 855 defines the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, and the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements. ASC 855 is effective for fiscal years and interim periods
ending after June 15, 2009. The Company adopted ASC 855 as of August 31, 2009
and anticipates that the adoption will impact the accounting and disclosure of
future transactions. The Company’s management has evaluated and disclosed
subsequent events from the balance sheet date of November 30, 2009 through
January 13, 2010, the day before the date that these condensed consolidated
financial statements were included in the Company’s Quarterly Report on Form
10-Q and filed with the SEC.
 
 ASC Topic 825, Financial Instruments, (“ASC
825”) (previously FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107,
Disclosures about Fair Value
of Financial Instruments), to require disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This ASC 825 also amends APB Opinion
No. 28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. The adoption of ASC 825 did
not have a material impact on the Company’s condensed consolidated financial
statements for the three months ended November 30, 2009.
  In June 2009, the FASB issued SFAS No.
167, Amendments to FASB
Interpretation No. 46(R), (“SFAS 167”), which has not yet been codified
in the ASC. The amendments include: (1) the elimination of the exemption for
qualifying special purpose entities, (2) a new approach for determining who
should consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. This
statement is effective for fiscal years beginning after November 15, 2009, and
for interim periods within that first annual reporting period. The Company is
currently evaluating the impact of this standard, however, it does not expect
SFAS 167 will have a material impact on its condensed consolidated financial
statements.
 
 In June 2009, the FASB issued ASC Topic
105, Generally Accepted
Accounting Standards, (“ASC 105”) (previously SFAS No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162),
(the “Codification”). The Codification, which was launched on July 1, 2009,
became the single source of authoritative nongovernmental U.S. GAAP, superseding
existing FASB, American Institute of Certified Public Accountants (“AICPA”),
EITF and related literature. The Codification eliminates the GAAP hierarchy
contained in ASC 105 and establishes one level of authoritative GAAP. All other
literature is considered non-authoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Company adopted ASC 105 as of September 1, 2009 however,
references to both current GAAP and the Codification are included in this
filing. The Company has determined that this provision had no material impact on
its condensed consolidated financial statements for the three months ended
November 30, 2009.
  (3) INTANGIBLE ASSETS AND GOODWILL
 
 On January 27, 2006, BioMarin
Pharmaceutical Inc. (“BioMarin”) assigned the intellectual property and other
rights relating to the RAP technology to the Company. As consideration for the
assignment of the RAP technology, BioMarin will receive milestone payments based
on certain financing and regulatory triggering events. No other consideration
was paid for this assignment. The Company has recorded $150,000 of intangible
assets on the consolidated balance sheets as of November 30, 2009 and August 31,
2009 based on the estimated fair value of its agreement with
BioMarin.
 
 On December 14, 2007, the Company
acquired the intellectual property and other rights to develop DR Cysteamine to
treat various indications from the University of California at San Diego
(“UCSD”) by way of a merger with Encode Pharmaceuticals, Inc. (“Encode”), a
privately held research and development company, which held the intellectual
property license with UCSD.
 
 Intangible assets recorded as a result
of the 2009 merger were approximately $1.1 million as discussed in Note 9
below.
 
 
 
 
 
 
 -12-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A
Development Stage Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 The intangible assets, recorded at
approximately $2.6 million acquired in the merger with Encode, were primarily
based on the value of the Company’s common stock and warrants issued to the
Encode stockholders:
 
 Intangible
      asset (IP license) related to the Encode merger, gross
              
              $
              2,620,000Intangible
      asset related to NeuroTransTM
      purchase from BioMarin, gross
              
              
              150,000Intangible
      assets (out-license) related to the 2009 Merger, gross
              
              
              240,000In-process
      research and development (IP license) related to the 2009 Merger,
      gross
              
              900,000Total
      gross intangible assets
              
              
              3,910,000Less
      accumulated amortization
              
              
              (282,333
              )Intangible
      assets, net
              
              $
              3,627,667
 
 The intangible assets related to DR
Cysteamine and NeuroTransTM are
being amortized monthly over 20 years, which are the life of the intellectual
property patents and the estimated useful life. The 20 year estimated useful
life is also based upon the typical development, approval, marketing and life
cycle management timelines of pharmaceutical drug products. The intangible
assets related to the out-license will be amortized using the straight-line
method over the estimated useful life of 16 years, which is the life of the
intellectual property patents.The intangible assets related to NGX 426 will not
be amortized until the product is developed.  During the three months
ended November 30, 2009 and 2008 and the cumulative period from September 8,
2005 (inception) to November 30, 2009, the Company amortized $37,124, $34,624,
and $282,332, respectively, of intangible assets to research and development
expense.
 
 The following table summarizes the
actual and estimated amortization expense for our intangible assets for the
periods indicated:
 
 Amortization
      period
              
              Amortization
      expenseSeptember
      8, 2005 (inception) to August 31, 2006 – actual
              
              $
              4,375Fiscal
      year ending August 31, 2007 – actual
              
              
              7,500Fiscal
      year ending August 31, 2008 – actual
              
              
              94,833Fiscal
      year ending August 31, 2009 – actual
              
              
              138,500Fiscal
      year ending August 31, 2010 – estimate
              
              
              141,000Fiscal
      year ending August 31, 2011 – estimate
              
              
              153,500Fiscal
      year ending August 31, 2012 – estimate
              
              
              153,500Fiscal
      year ending August 31, 2013 – estimate
              
              
              153,500Fiscal
      year ending August 31, 2014 – estimate
              
              
              153,500Fiscal
      year ending August 31, 2015 – estimate
              
              
              153,500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -13-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
  (4) FIXED ASSETS
  
 Fixed assets consisted of:
 Category
              
              November
      30, 2009
              
              
              August
      31, 2009
              
              
              Estimated
      useful livesLeasehold
      improvements
              
              $
              113,422
              
              
              $
              113,422
              
              
              Shorter
      of life of asset or lease termOffice
      furniture
              
              
              3,188
              
              
              
              3,188
              
              
              7
      yearsLaboratory
      equipment
              
              
              277,303
              
              
              
              277,303
              
              
              5
      yearsComputer
      hardware and software
              
              
              83,740
              
              
              
              80,437
              
              
              
              3
      yearsCapital
      lease equipment
              
              
              14,006
              
              
              
              14,006
              
              
              Shorter
      of life of asset or lease termTotal
      at cost
              
              
              491,659
              
              
              
              488,356Less:
      accumulated depreciation
              
              
              (360,791
              )
              
              
              (343,621
              )Total
      fixed assets, net
              
              $
              130,868
              
              
              $
              144,735
 
 Depreciation expense for the three
months ended November 30, 2009 and 2008 and the cumulative period from September
8, 2005 (inception) to November 30, 2009 was $17,169, $21,996 and $368,109,
respectively. Accumulated depreciation on capital lease equipment was $5,028 and
$3,951 as of  November 30, 2009 and August 31, 2009,
respectively.
  (5) FAIR VALUE
MEASUREMENT
 
 The Company uses a fair-value approach
to value certain assets and liabilities. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. As such, fair
value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability.
The Company uses a fair value hierarchy, which distinguishes between assumptions
based on market data (observable inputs) and an entity’s own assumptions
(unobservable inputs). The hierarchy consists of three levels:
 
 •
              
              Level
      one — Quoted market prices in active markets for identical assets or
      liabilities;•
              
              Level
      two — Inputs other than level one inputs that are either directly or
      indirectly observable; and•
              
              Level
      three — Unobservable inputs developed using estimates and assumptions,
      which are developed by the reporting entity and reflect those assumptions
      that a market participant would
use.
 
 Determining which category an asset or
liability falls within the hierarchy requires significant judgment. The Company
evaluates its hierarchy disclosures each quarter. Assets and liabilities
measured at fair value on a recurring basis at November 30, 2009 and August 31,
2009 are summarized as follows:
 
 Assets
              
              Level
      1
              
              Level
      2
              
              Level
      3
              
              
              November
      30, 2009Fair
      value of cash equivalents
              
              $1,027,231
              
              $                —
              
              $             —
              
              
              $1,027,231Total
              
              $1,027,231
              
              $                —
              
              $             —
              
              
              $1,027,231
 
 
 
 
 
 
 
 -14-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 
 
 Assets
              
              Level
      1
              
              Level
      2
              
              Level
      3
              
              
              August
      31, 2009Fair
      value of cash equivalents
              
              $
      3,515,353
              
              $                —
              
              $             —
              
              
              $  3,515,353Total
              
              $
      3,515,353
              
              $                —
              
              $             —
              
              
              $  3,513,353
 
 Cash equivalents represent the fair
value of our investment in two money market accounts as of November 30, 2009 and
August 31, 2009
  (6) ACCRUED
LIABILITIES
  
 Accrued liabilities consisted
of:
 November
      30, 2009
              
              
              August
      31, 2009Salaries
      and benefits and other obligations related to 2009 Merger
              
              $
              429,457
              
              
              $
              —Legal
      fees primarily due to 2009 Merger
              
              
              227,731
              
              
              
              195,552Accrued
      vacation
              
              
              52,786
              
              
              
              38,109Patent
      costs
              
              
              39,551
              
              
              
              10,500Salaries
      and wages
              
              
              34,397
              
              
              
              57,351Auditing
      and tax preparation fees
              
              
              33,710
              
              
              
              19,720Consulting
      — research and development
              
              
              26,650
              
              
              
              21,0002009
      Merger joint proxy/prospectus
              
              
              —
              
              
              
              109,011Total
      accrued liabilities
              
              $
              844,282
              
              
              $
              451,243
 
 (7) IN-PROCESS RESEARCH AND
DEVELOPMENT
 
 On October 17, 2007, the Company
purchased certain assets of Convivia, Inc. (“Convivia”) including intellectual
property, know-how and research reports related to a product candidate targeting
liver aldehyde dehydrogenase (“ALDH2”) deficiency, a genetic metabolic disorder.
The Company issued an aggregate of 101,991 shares of its restricted,
unregistered common stock to the seller and other third parties in settlement of
the asset purchase. Pursuant to ASC Topic 730, Research and Development,
(previously Financial Accounting Standard (“FAS”) 2 Paragraph 11(c), Intangibles Purchased From
Others), the Company has expensed the value of the common stock issued in
connection with this asset purchase as in-process research and development
expense. The amount expensed was based upon the closing price of Raptor’s common
stock on the date of the closing of the asset purchase transaction of $2.359 per
share multiplied by the aggregate number of shares of Raptor common stock issued
or 101,991 for a total expense of $240,625 recorded on Raptor’s consolidated
statement of operations during the year ended August 31, 2008.
 
 (8) STOCK OPTION
PLAN
 
 Effective September 1, 2006, the
Company began recording compensation expense associated with stock options and
other forms of equity compensation in accordance with ASC 718, as interpreted by
ASC 718. Prior to September 1, 2006, the Company accounted for stock options
according to the provisions of Accounting Principles Board (“APB”) Opinion No.
25, Accounting for Stock
Issued to Employees, and related interpretations, and therefore no
related compensation expense was recorded for awards granted with no intrinsic
value. The Company adopted the modified prospective transition method provided
for under ASC 718, and consequently has not retroactively adjusted results from
prior periods. Under this transition method, compensation cost associated with
stock options now includes: (1) quarterly amortization related to the remaining
unvested portion of all stock option awards granted prior to September 1, 2006,
based on the grant date value estimated in accordance with the original
provisions of ASC 718; and (2) quarterly amortization related to all stock
option
 
 
 
 
 
 -15-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
  
 awards
granted subsequent to September 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of ASC 718. In addition, the Company
records consulting expense over the vesting period of stock options granted to
consultants. The compensation expense for stock-based compensation awards
includes an estimate for forfeitures and is recognized over the requisite
service period of the options, which is typically the period over which the
options vest, using the straight-line method. Employee stock-based compensation
expense for the three months ended November 30, 2009 and 2008 and for the
cumulative period from September 8, 2005 (inception) to November 30, 2009 was
$25,803, $116,518, and $1,240,830 of which cumulatively $1,051,583 was included
in general and administrative expense and $189,247 was included in research and
development expense. No employee stock compensation costs were recognized for
the period from September 8, 2005 (inception) to August 31, 2006, which was
prior to the Company’s adoption of ASC 718.
 
 Stock-based compensation expense was
based on the Black-Scholes option-pricing model assuming the
following:
 ExpectedRisk-free
              
              
              life
      of stock
              
              
              Annual
              
              
              AnnualPeriod*
              
              interest
      rate
              
              
              option
              
              
              volatility
              
              
              turnover
      rateSeptember
      8, 2005 (inception) to August 31, 2006**
              
              
              5
              %
              
              10
      years
              
              
              100
              %
              
              
              0
              %Quarter
      ended November 30, 2006
              
              
              5
              %
              
              8
      years
              
              
              100
              %
              
              
              10
              %Quarter
      ended February 28, 2007
              
              
              5
              %
              
              8
      years
              
              
              100
              %
              
              
              10
              %Quarter
      ended May 31, 2007
              
              
              5
              %
              
              8
      years
              
              
              100
              %
              
              
              10
              %Quarter
      ended August 31, 2007
              
              
              4
              %
              
              8
      years
              
              
              100
              %
              
              
              10
              %Quarter
      ended November 30, 2007
              
              
              3.75
              %
              
              8
      years
              
              
              109
              %
              
              
              10
              %Quarter
      ended February 29, 2008
              
              
              2
              %
              
              8
      years
              
              
              119
              %
              
              
              10
              %Quarter
      ended May 31, 2008
              
              
              2
              %
              
              8
      years
              
              
              121
              %
              
              
              10
              %Quarter
      ended August 31, 2008
              
              
              2.5
              %
              
              8
      years
              
              
              128
              %
              
              
              10
              %Quarter
      ended November 30, 2008
              
              
              1.5
              %
              
              7
      years
              
              
              170
              %
              
              
              10
              %Quarter
      ended February 28, 2009
              
              
              2.0
              %
              
              7
      years
              
              
              220
              %
              
              
              10
              %Quarter
      ended May 31, 2009
              
              
              2.6
              %
              
              7
      years
              
              
              233
              %
              
              
              10
              %Quarter
      ended August 31, 2009
              
              
              3.2
              %
              
              7
      years
              
              
              240
              %
              
              
              10
              %Quarter
      ended November 30, 2009
              
              
              3.0
              %
              
              7
      years
              
              
              245
              %
              
              
              10
              %
 
 *
              
              Dividend
      rate is 0% for all period presented.**
              
              Stock-based
      compensation expense was recorded on the consolidated statements of
      operations commencing on the effective date of ASC 718, September 1, 2006.
      Prior to September 1, 2006, stock based compensation was reflected only in
      the footnotes to the consolidated statements of operations, with no effect
      on the consolidated statements of operations, per the guidelines of APB
      No. 25. Consultant stock-based compensation expense has been recorded on
      the consolidated statements of operations since
  inception.
 
 If factors change and different
assumptions are employed in the application of ASC 718, the compensation expense
recorded in future periods may differ significantly from what was recorded in
the current period.
 
 The Company recognizes as an expense
the fair value of options granted to persons who are neither employees nor
directors. The fair value of expensed options was based on the Black-Scholes
option-pricing model assuming the same factors shown in the stock-based
compensation expense table above. Stock-based compensation expense for
consultants for the three months ended November 30, 2009 and 2008 and for the
cumulative period from September 8, 2005 (inception) to November
30,
 
 -16-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 
 2009,
were $65,200, $12,993 and $472,813, respectively, of which cumulatively $113,439
was included in general and administrative expense and $359,374 was included in
research and development expense.
 
 A summary of the activity in the 2006
Equity Compensation Plan, as amended and the Company’s other stock option plans,
is as follows:
 Weighted
      average
              
              
              
              
              
              
              Weighted
      averageOption
      shares
              
              
              exercise
      price
              
              
              Exercisable
              
              
              fair
      value of
                options
      grantedOutstanding
      at September 8, 2005
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Granted
              
              
              580,108
              
              
              $
              2.64
              
              
              
              —
              
              
              $
              2.47Exercised
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Canceled
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Outstanding
      at August 31, 2006
              
              
              580,108
              
              
              $
              2.64
              
              
              
              4,010
              
              
              $
              2.47Granted
              
              
              107,452
              
              
              $
              2.56
              
              
              
              —
              
              
              $
              2.31Exercised
              
              
              (3,381
              )
              
              $
              2.57
              
              
              
              —
              
              
              $
              2.40Canceled
              
              
              —
              
              
              
              —
              
              
              
              —Outstanding
      at August 31, 2007
              
              
              684,179
              
              
              $
              2.63
              
              
              
              273,236
              
              
              $
              2.45Granted
              
              
              223,439
              
              
              $
              2.27
              
              
              
              —
              
              
              $
              2.21Exercised
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Canceled
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Outstanding
      at August 31, 2008
              
              
              907,618
              
              
              $
              2.54
              
              
              
              600,837
              
              
              $
              2.39Granted
              
              
              81,595
              
              
              $
              1.13
              
              
              
              —
              
              
              $
              1.04Exercised
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Canceled
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Outstanding
      at August 31, 2009
              
              
              989,213
              
              
              $
              2.42
              
              
              
              826,303
              
              
              $
              2.28Granted
              
              50,590
              
              
              $
              3.43
              
              
              
              34,959
              
              
              $
              2.26Assumed
      in the 2009 Merger
              
              161,044
              
              
              $
              114.12
              
              
              
              158,475
              
              
              
              —Exercised
              
              (2,115
              )
              
              $
              2.24
              
              
              
              —
              
              
              
              —Canceled
              
              (2,569
              )
              
              $
              819.17
              
              
              
              —
              
              
              
              —Outstanding
      at November 30, 2009
              
              1,196,163
              
              
              $
              17.26
              
              
              
              1,109,737
              
              
              $
              2.39
 
 The weighted average intrinsic values
of stock options outstanding and expected to vest and stock options exercisable
as of November 30, 2009 and 2008 were $906,974, $692,785, zero and zero
respectively.
 
 There were 1,208,104 options available
for grant under the 2006 Equity Compensation Plan, as amended, and under the
stock option plans assumed in the 2009 Merger as of November 30, 2009. As of
November 30, 2009, the options outstanding consisted of the
following:
 Options
      outstanding
              
              
              Options
      exercisableWeighted
              
              
              WeightedNumber
      of options
              
              
              average
      remaining
              
              
              average
      exercise
              
              
              Number
      of options
              
              
              Weighted
      averageRange
      of exercise prices
              
              outstanding
      (#)
              
              
              contractual
      life (yrs.)
              
              
              price
      ($)
              
              
              exercisable
      (#)
              
              
              exercise
      price ($)$0
      to $1.00
              
              
              34,969
              
              
              
              9.37
              
              
              
              .85
              
              
              
              5,099
              
              
              
              0.85$1.01
      to $2.00
              
              
              78,684
              
              
              
              8.93
              
              
              
              1.56
              
              
              
              38,427
              
              
              
              1.55$2.01
      to $3.00
              
              
              873,445
              
              
              
              6.95
              
              
              
              2.56
              
              
              
              803,499
              
              
              
              2.58$3.01
      to $4.00
              
              
              94,146
              
              
              
              9.87
              
              
              
              3.52
              
              
              
              59,178
              
              
              
              3.84$4.01
      to $5.00
              
              62,104
              
              
              
              9.87
              
              
              
              4.57
              
              
              58,604
              
              
              
              4.59$5.01
      to $1,564
              
              52,815
              
              
              
              5.00
              
              
              
              333.83
              
              
              52,815
              
              
              
              333.831,196,163
              
              
              
              7.32
              
              
              
              17.26
              
              
              
              1,017,622
              
              
              
              19.92
 
 -17-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
  
 At
November 30, 2009, the total unrecognized compensation cost was approximately
$260,000. The weighted average period over which it is expected to be recognized
is 3.25 years.
  (9) ISSUANCE OF COMMON
STOCK
  
 ISSUANCE OF COMMON STOCK PURSUANT TO
COMMON STOCK WARRANT EXERCISES AND STOCK OPTION EXERCISES
 
 During the three month period ended
November 30, 2009, the Company received $56,018 from the exercise of a warrant
issued to a placement agent in the May/June 2008 private placement in exchange
for the issuance of 23,744 shares of the Company’s common stock and the Company
issued 7,680 shares of its common stock resulting from a cashless exercise of a
warrant issued in 2007 in connection with the purchase of DR
Cysteamine.  During cumulative period from September 8, 2005
(inception) through November 30, 2009, the Company received $6.566 million from
the exercise of warrants in exchange for the issuance of an aggregate of
3,576,454 shares.
 
 During the three month period ended
November 30, 2009, the Company received $4,750  from the exercise of
stock options in exchange for 2,115 shares of the Company’s common
stock.  For the cumulative period from September 8, 2005 (inception)
through November 30, 2009, the Company received $13,898 from the exercise of
stock options resulting in the issuance of 5,495 shares of common stock. Total
common stock outstanding as of November 30, 2009 was 18,831,957
shares.
 
 ISSUANCE OF COMMON STOCK PURSUANT TO
AN ASSET PURCHASE AGREEMENT WITH CONVIVIA, INC.
 
 On October 18, 2007, the Company
purchased certain assets of Convivia, Inc. (“Convivia”) including intellectual
property, know-how and research reports related to a product candidate targeting
liver aldehyde dehydrogenase (“ALDH2”) deficiency, a genetic metabolic disorder.
The Company 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 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. In October 2008, Mr. Daley was issued
23,312 shares of restricted Raptor 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. 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
condensed consolidated statement of operations for the year ended August 31,
2008.
 
 MERGER
OF RAPTOR’S 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 Pharmaceuticals, Inc. (“Encode”), a privately held development stage
company. 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
  
   -18-
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
 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 such
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 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 principle operations, 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 (“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
Non-alcoholic steatohepatitis (“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. To-date, Raptor has paid
$270,000 in milestone payments to UCSD based upon the initiation of clinical
trials in cystinosis and in NASH.
 
 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 “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 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 our Board members serves on
the board of Limetree Capital.
 
 -19-
 RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 
 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 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 them 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.
 
 2009
MERGER AND NASDAQ LISTING
 
 On September 29, 2009, the Company,
formerly known as TorreyPines Therapeutics, Inc. (“TorreyPines”) and Raptor
Pharmaceuticals Corp. (“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 and/or retained the
Company’s stock options and warrants outstanding at the merger, subject to the
same adjustment factor as 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, C.P.A., 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 merger, including, having
access to an expanded pipeline of product candidates and having development
capabilities across a wider spectrum of diseases and markets. Another primary
reason for RPC’s board of directors’ decision to merge with TorreyPines was the
benefit anticipated
 
 -20-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
  
 from the
additional liquidity expected from having a NASDAQ trading market on which the
combined company’s common stock could be listed. This 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
              
              
              
              13Other
      current assets
              
              
              0.10
              
              
              
              2Accrued
      liabilities
              
              
              (0.68
              )
              
              
              (15)Intangible
      assets:In-process
      research & development
              
              
              0.90
              
              
              
              20Licenses
              
              
              0.24
              
              
              
              6Total
      identifiable assets
              
              
              1.14
              
              
              
              26Plus
      Goodwill
              
              
              3.28
              
              
              
              74Total
      net assets acquired
              
              $
              4.42
              
              
              
              100
 
 Acquisition costs incurred by the
Company related to the merger were approximately $0.6 million and were expensed
as incurred. If the reverse merger had occurred on September 1, 2008, the
Company’s revenues would have increased by approximately $1.5 million from fees
earned by TorreyPines from the sale one of its programs in the quarter ended
December 31, 2008 for total pro forma revenues of $1.5 million for the three
months ended November 30, 2008. Net loss would have increased by approximately
$2.5 million due to an increase of revenues of $1.5 million described above
offset by $3.1 million of loss on impairment of purchased patents recognized by
TorreyPines during the period plus $0.9 million in transaction costs and costs
associated with obligations owed to the TorreyPines employees for a pro forma
net loss of $4.8 million (or $(0.32) per share) for the three month period ended
November 30, 2008.  If the reverse merger had occurred on September 1,
2009, the Company’s revenues would have remained zero. Net loss would have
increased by approximately $0.3 million due to the transaction costs which were
accrued during our year ended August 31, 2009, for a pro forma net loss of $3.2
million or $(0.17) per share.
 
 The following is a summary of common
stock outstanding as of November 30, 2009:
 Common
      StockTransaction
              
              Date
              
              IssuedFounders’
      shares
              
              Sept.
      2005
              
              
              1,398,742Seed
      round
              
              Feb.
      2006
              
              
              466,247PIPE
      concurrent with reverse merger
              
              May
      2006
              
              
              1,942,695Shares
      issued in connection with reverse merger
              
              May
      2006
              
              
              3,100,541Warrant
      exercises
              
              Jan.
      – Nov. 2007
              
              
              1,513,359Stock
      option exercises
              
              Mar.
      2007
              
              
              3,380Loan
      finder’s fee
              
              Sept.
      2007
              
              
              46,625Convivia
      asset purchase
              
              Oct.
      2007 – Nov. 2008
              
              
              148,616Encode
      merger DR Cysteamine asset purchase
              
              Dec.
      2007
              
              
              802,946Shares
      issued pursuant to consulting agreement
              
              May
      2008
              
              
              2,040PIPE
      — initial tranche
              
              May
      2008
              
              
              1,030,405PIPE
      — second tranche
              
              May
      2008
              
              
              69,937PIPE
      — third tranche
              
              June
      2008
              
              
              3,562,126Warrant
      exercises from warrant exchange
              
              June/July
      2009
              
              
              2,031,670PIPE
              
              August
      2009
              
              
              1,738,226Warrant
      exercises
              
              September
      2009
              
              
              31,424Shares
      issued in connection with reverse merger
              
              September
      2009
              
              
              940,863Stock
      option exercises
              
              October
      2009
              
              
              2,115Total
      shares of common stock outstanding
              
              
              
              
              18,831,957-21-
 
 
 RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
  (10) WARRANTS
 The table reflects the number common
stock warrants outstanding as of November 30, 2009:
 Number
      ofshares
                exercisable
              
              
              Exercise
      price
              
              
              Expiration
      dateSummary
      of outstanding warrants:Issued
      in lieu of deferred legal fees
              
              
              13,987
              
              
              $
              2.57
              
              
              
              2/13/2011Issued
      in connection with Encode merger
              
              
              233,309
              
              
              $
              2.87
              
              
              
              12/13/2015Issued
      to PIPE investors in May / June 2008
              
              
              299,564
              
              
              $
              3.86
              
              
              
              5/21/2010Issued
      to placement agents in May / June 2008
              
              
              465,816
              
              
              $
              2.36
              
              
              
              5/21/2013Issued
      to PIPE investors in August 2009
              
              
              869,113
              
              
              $
              2.57/$3.22
              *
              
              
              8/21/2011Issued
      to placement agents in August 2009
              
              
              129,733
              
              
              $
              1.50
              
              
              
              8/21/2014TorreyPines
      warrants assumed in 2009 Merger
              
              9,271
              
              
              $
              87.71
              **
              
              
              7/1/2010  9/26/2015Total
      warrants outstanding
              
              
              2,020,793
              
              
              $
              3.07
              **
 
 *
              
              First
      year exercisable at $2.57; second year exercisable at
  $3.22**
              
              Average
      exercise price
  (11) COMMITMENTS AND
CONTINGENCIES
  CONTRACTUAL OBLIGATIONS WITH
BIOMARIN
 
 Pursuant to the terms of the asset
purchase agreement the Company entered into with BioMarin Pharmaceutical Inc.
(“BioMarin”) for the purchase of intellectual property related to our
receptor-associated protein (“RAP”) based technology (including NeuroTransTM), we
are obligated to make the following milestone payments to BioMarin upon the
achievement of the following events:
 $50,000
(paid by the Company in June 2006) within 30 days after Raptor receives total
aggregate debt or equity financing of at least $2,500,000;
 $100,000
(paid by the Company in June 2006) within 30 days after Raptor receives total
aggregate debt or equity financing of at least $5,000,000;
 $500,000
upon the Company’s filing and acceptance of an investigational new drug
application for a drug product candidate based on the NeuroTransTM product
candidate;
 $2,500,000
upon the Company’s successful completion of a Phase II human clinical trial for
a drug product candidate based on the NeuroTransTM product
candidate;
 $5,000,000
upon on the Company’s successful completion of a Phase III human clinical trial
for a drug product candidate based on the NeuroTransTM product
candidate;
 $12,000,000
within 90 days of the Company’s obtaining marketing approval from the FDA or
other similar regulatory agencies for a drug product candidate based on the
NeuroTransTM product candidate;
 $5,000,000
within 90 days of the Company’s obtaining marketing approval from the FDA or
other similar regulatory agencies for a second drug product candidate based on
the NeuroTransTM product candidate;
 $5,000,000
within 60 days after the end of the first calendar year in which the Company’s
aggregated revenues derived from drug product candidates based on the
NeuroTransTM product candidate exceed $100,000,000; and
 $20,000,000
within 60 days after the end of the first calendar year in which the Company’s
aggregated revenues derived from drug product candidates based on the
NeuroTransTM product candidate exceed $500,000,000.
 
 In addition to these milestone
payments, the Company is also obligated to pay BioMarin a royalty at a
percentage of the Company’s aggregated revenues derived from drug product
candidates based on the NeuroTransTM
product candidate. On June 9, 2006, the Company made a milestone payment in the
amount of $150,000 to BioMarin because the Company raised $5,000,000 in its May
25, 2006 private placement financing. If the Company becomes insolvent or if the
Company breaches its asset purchase agreement with BioMarin due to non-payment
and the Company does not cure its non-payment within the stated cure period, all
of the Company’s rights to the RAP technology (including NeuroTransTM)
will revert back to BioMarin.
 
 -22-
 
 
 RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 
 CONTRACTUAL OBLIGATIONS WITH THOMAS
E. DALEY (ASSIGNEE OF THE DISSOLVED CONVIVIA, INC.)
 
 Pursuant to the terms of the asset
purchase agreement (“Asset Purchase Agreement”), the Company entered into with
Convivia, Inc. and Thomas E. Daley for the purchase of intellectual property
related to its 4-MP product candidate program, Mr. Daley will be entitled to
receive the following, if at all, in such amounts and only to the extent certain
future milestones are accomplished by the Company (or any of its subsidiaries
thereof), as set forth below:
 
 23,312
shares of Raptor’s restricted, unregistered Common Stock within fifteen (15)
days after the Company enters into a manufacturing license or other agreement to
produce any product that is predominantly based upon or derived from any assets
purchased from Convivia (“Purchased Assets”) in quantity (“Product”) if such
license agreement is executed within one (1) year of execution of the Asset
Purchase Agreement or, if thereafter, 11,656 shares of Raptor’s restricted,
unregistered Common Stock. Should the Company obtain a second such license or
agreement for a Product, Mr. Daley will be entitled to receive 11,656 shares of
the Company’s restricted, unregistered Common Stock within 30 days of execution
of such second license or other agreement. On March 31, 2008, the Company issued
23,312 shares of Raptor’s Common Stock valued at $56,000 to Mr. Daley pursuant
to this milestone reflecting the execution of an agreement to supply the active
pharmaceutical ingredient for ConviviaTM,
combined with the execution of a formulation agreement to produce the oral
formulation of ConviviaTM.
 
 23,312
shares of the Company’s restricted, unregistered Common Stock within fifteen
(15) days after it receives its first patent allowance on any patents which
constitute part of the Purchased Assets in any one of certain predetermined
countries (“Major Market”).
 
 11,656
shares of the Company’s restricted, unregistered Common Stock within fifteen
(15) days after the Company receives its second patent allowance on any patents
which constitute part of the Purchased Assets different from the patent
referenced in the immediately preceding bullet point above in a Major
Market.
 
 23,312
shares of the Company’s restricted, unregistered Common Stock within fifteen
(15) days of completing predetermined benchmarks in a Major Market by the
Company or its licensee of the first phase II human clinical trial for a Product
(“Successful Completion”) if such Successful Completion occurs within one (1)
year of execution of the Asset Purchase Agreement or, if thereafter, 11,656
shares of the Company’s restricted, unregistered Common Stock within thirty (30)
days of such Successful Completion. In October 2008, the Company issued 23,312
shares of Raptor’s Common Stock valued at $27,000 and a $30,000 cash bonus
(pursuant to Mr. Daley’s employment agreement) to Mr. Daley pursuant to the
fulfillment of this milestone.
 
 11,656
shares of the Company’s restricted, unregistered Common Stock within fifteen
(15) days of a Successful Completion in a Major Market by the Company’s or its
licensee of the second phase II human clinical trial for a Product (other than
the Product for which a distribution is made under the immediately preceding
bullet point above).
 
 23,312
shares of the Company’s restricted, unregistered Common Stock within fifteen
(15) days after the Company or its licensee applies for approval to market and
sell a Product in a Major Market for the indications for which approval is
sought (“Marketing Approval”).
  11,656
shares of the Company’s restricted, unregistered Common Stock within fifteen
(15) days after the Company or its licensee applies for Marketing Approval in a
Major Market (other than the Major Market for which a distribution is made under
the immediately preceding bullet point above).
 
 46,625
shares of the Company’s restricted, unregistered Common Stock within fifteen
(15) days after the Company or its licensee obtains the first Marketing Approval
for a Product from the applicable regulatory agency in a Major
Market.
 
 23,312
shares of the Company’s restricted, unregistered Common Stock within fifteen
(15) days after the Company or its licensee obtains Marketing Approval for a
Product from the applicable regulatory agency in a Major Market (other than the
Major Market for which a distribution is made under the immediately preceding
bullet point above).
 
 As discussed above, in aggregate, the
Company has issued to Mr. Daley, 46,625 shares of Raptor’s common stock valued
at $83,000 and paid $30,000 in cash bonuses related to ConviviaTM
milestones along with another $20,000 in cash bonuses related to employment
milestones pursuant to Mr. Daley’s employment agreement.
 -23-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
 CONTRACTUAL OBLIGATIONS WITH FORMER
ENCODE STOCKHOLDERS AND UCSD RELATING TO THE ACQUISITION OF THE DR CYSTEAMINE
LICENSE
 
 As a result of the merger between our
clinical subsidiary and Encode, as discussed in Note 9 above, the Encode
Securityholders are eligible to receive up to an additional 559,496 shares of
Raptor’s common stock, Company Options and Company Warrants to purchase Raptor’s
common stock in the aggregate based on certain triggering events related to
regulatory approval of DR Cysteamine, an Encode product program, if completed
within the five year anniversary date of the merger agreement.
 
 Also as a result of the merger, the
Company will be obligated to pay an annual maintenance fee to UCSD for the
exclusive license to develop DR Cysteamine for certain indications of $15,000
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 we begin 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. In addition, the Company is
obligated to, among other things, secure $1 million in funding prior to December
18, 2008 (which the Company has fulfilled by raising $10 million in its May/June
2008 private placement) and annually spend at least $200,000 for the development
of products (which, as of its fiscal year ended August 31, 2009, the Company has
fulfilled by spending approximately $4.1 million on such programs) pursuant to
the License Agreement. To-date, we have paid $270,000 in milestone payments to
UCSD based upon the initiation of clinical trials in cystinosis and in NASH. To
the extent that the Company fails to perform any of its obligations under the
License Agreement, then UCSD may terminate the license or otherwise cause the
license to become non-exclusive.
 
 CONTRACTUAL OBLIGATIONS TO TPTX, INC.
EMPLOYEES
 
 Pursuant to the documents related to
the 2009 Merger, including amended employment agreements with the TPTX, Inc.
employees, who were former executives of TorreyPines prior to the merger, the
Company is obligated to pay such former executives their salaries, benefits and
other obligations through February 28, 2010.  The remaining aggregate
of the obligations as of November 30, 2009 are approximately
$429,000.
 
 OFFICE LEASES
 
 In March 2006, the Company entered into
a lease for the Company’s executive offices and research laboratory in Novato,
California. Base monthly payments were $5,206 per month subject to annual rent
increase of between 3% to 5%, based on the Consumer Price Index (“CPI”). In
March 2006, the Company paid $20,207 as a security deposit on this lease, which
expired in March 2009. Effective April 1, 2007, the Company leased additional
office space adjoining the existing leased space, increasing our base rent to
$9,764 per month without extending the term of the original lease. The original
lease allows for one three-year extension at the market rate and up to $18,643
in reimbursement for tenant improvements. In June 2008, the Company’s rent
increased to $10,215 reflecting a CPI increase of 3% plus an increase in
operating costs for the period from April 1, 2008 to March 31, 2009. In
September 2008, the Company executed a lease addendum replacing the one
three-year extension with two two-year extensions commencing on April 1, 2009
and renegotiated the first two-year extension base rent to $10,068 with an
adjustment after the first year for CPI between 3% (minimum) and 5% (maximum).
During the three month period ended November 30, 2009 and 2008 and the
cumulative period from September 8, 2005 (inception) to November 30, 2009, the
Company paid $34,597, $31,645 and $402,992, respectively, in rent.
 
 The
minimum future lease payments under this operating lease assuming a 3% CPI
increase per year are as follows:
 Period
              
              AmountFiscal
      year ending August 31, 2010
              
              $
              94,080September
      1, 2010 to March 31, 2011
              
              
              74,133
 
  
  -24-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 CAPITAL LEASE
 
 In June 2006, the Company leased a
photocopier machine for 36 months at $242 per month. There was no purchase
option at the end of the lease. Based on the fair value and estimated useful
life of the photocopier and the life of the lease and the photocopier, the
Company has accounted for the lease as a capital lease. In September 2008, the
Company replaced the originally leased photocopier with a new photocopier which
is subject to a 39-month lease at $469 per month. There were no penalties
imposed for cancelling the original lease.
 
 The
future lease payments under the capital lease are as follows:
 Period
              
              AmountFiscal
      year ending August 31, 2010
              
              $
              4,218Fiscal
      year ending August 31, 2011
              
              
              5,625September
      1, 2011 to December 31, 2011
              
              
              1,875Total
      future capital lease payments
              
              
              11,718Less
      interest
              
              
              (1,891
              )Total
      current and long-term capital lease liability
              
              $
              9,827
 
 Interest rate on the capital lease is
17% based on the lessor’s implicit rate of return.
 
 RESEARCH
AGREEMENT
 
 During the three month period ended
November 30, 2009, the Company entered into a contract with a research company
to develop research assays for Raptor’s cystinosis program.
 
 The future commitments pursuant to the
research agreement are as follows:
 
 Period
              
              AmountDecember
      1, 2009 through August 31, 2010
              
              $
              88,200
 
 STORAGE
AND CLINICAL DISTRIBUTION AGREEMENT
 
 During the three month period ended
November 30, 2009, the Company entered into an agreement with a company that
stores and distributes clinical materials for Raptor’s cystinosis trial. The
future commitments pursuant to this agreement are as follows:
 Period
              
              AmountDecember
      1, 2009 through August 31, 2010
              
              $
              89,896Fiscal
      year ending August 31, 2011
              
              
              113,868Fiscal
      year ending August 31, 2012
              
              
              105,395Fiscal
      year ending August 31, 2013
              
              
              22,141
 
 FORMULATION / MANUFACTURING
AGREEMENTS
 
 In April 2008, the Company executed an
agreement with a contract manufacturing organization to formulate and
manufacture DR Cysteamine for its cystinosis program. The costs are invoiced to
the Company in installments throughout the formulation and manufacturing
process. Also in July 2008, the Company executed a supply agreement with a
contract manufacturer for the active pharmaceutical agreement of DR Cysteamine.
The future commitments pursuant to these contracts are as follows:
 Period
              
              AmountDecember
      1, 2009 through August 31, 2010
              
              $
              1,785,332Fiscal
      year ending August 31, 2011
              
              
              245,777Fiscal
      year ending August 31, 2012
              
              
              67,439
 
 
 -25-
  
  RAPTOR
PHARMACEUTICAL CORP.
 (A Development Stage
Company)
 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 
  (12) SUBSEQUENT
EVENTS
 
 The Company’s management has evaluated
and disclosed subsequent events from the balance sheet date of November 30, 2009
through January 13, 2010, the day before the date that the condensed
consolidated financial statements were included in Company’s Quarterly Report on
Form 10-Q and filed with the SEC.
 
 On
December 17, 2009, the Company entered into a Placement Agent Agreement with
Ladenburg Thalmann & Co. Inc. as placement agent (the “Placement Agent”,
relating to the issuance and sale to the Investors (as defined below) pursuant
to a registered direct offering (the “Offering”) of up to
3,747,558  units (the “Units”), consisting of (i) 3,747,558 shares of
our 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
Placement Agent for the Offering received a placement fee equal to 6.5% of the
gross cash proceeds to the Company from the 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 $141,000
using the following Black -Scholes pricing model assumptions: risk-free interest
rate 2.23%; expected term 5 years and annual volatility 247.24%) and $25,000 in
out-of-pocket accountable expenses.  The warrant issued to the
Placement Agent 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 Offering, following execution of the Placement Agreement,
the Company also entered into a definitive securities purchase agreement (the
“Purchase Agreement”), dated as of December 17, 2009, with 33 investors set
forth on the signature pages thereto (collectively, the “Investors”) with
respect to the Offering of the Units, whereby, on an aggregate basis, the
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
estimated net proceeds after commissions and expenses of approximately $6.9
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.  The
Series A Warrants were valued at $3.5 million (using the following Black
-Scholes pricing model assumptions: risk-free interest rate 2.23%; expected term
5 years and annual volatility 247.24%) and the Series B Warrants were valued at
$3.0 million (using the following Black -Scholes pricing model assumptions:
risk-free interest rate 0.56%; expected term 18 months and annual volatility
247.24%).  Based on the underlying terms of the Investor Warrants and
Placement Agent Warrants, management is currently assessing the proper
classification of the warrants as liability or equity.
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 -26-
 
 
 Item 2.             Management’s Discussion and Analysis
and Results of Operations.
  FORWARD-LOOKING
STATEMENTS
   In this
Quarterly Report on Form 10-Q, in other filings with the SEC and in press
releases and other public statements by our officers throughout the year, we
make or will make statements that plan for or anticipate the future. These
“forward-looking statements,” within the meaning of the Private Securities
Litigation Reform Act of 1995, include statements about our future business
plans and strategies, as well as other statements that are not historical in
nature. These forward-looking statements are based on our current
expectations.
  In some
cases, these statements can be identified by the use of terminology such as
“believes,” “expects,” “anticipates,” “plans,” “may,” “might,” “will,” “could,”
“should,” “would,” “projects,” “anticipates,” “predicts,” “intends,”
“continues,” “estimates,” “potential,” “opportunity” or the negative of these
terms or other comparable terminology. All such statements, other than
statements of historical facts, including our financial condition, future
results of operation, projected revenues and expenses, business strategies,
operating efficiencies or synergies, competitive positions, growth opportunities
for existing intellectual properties, technologies, products, plans, and
objectives of management, markets for our securities, and other matters, are
about us and our industry that involve substantial risks and uncertainties and
constitute forward-looking statements for the purpose of the safe harbor
provided by Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. Such forward-looking statements, wherever they
occur, are necessarily estimates reflecting the best judgment of our senior
management on the date on which they were made, or if no date is stated, as of
the date of the filing made with the SEC in which such statements were made. You
should not place undue reliance on these statements, which only reflect
information available as of the date that they were made. Our business’ actual
operations, performance, development and results might differ materially from
any forward-looking statement due to various known and unknown risks,
uncertainties, assumptions and contingencies, including those described in the
section titled “Risk Factors,” and including, but not limited to, the
following:
  
 •
              
              our
      need for, and our ability to obtain, additional funds;•
              
              uncertainties
      relating to clinical trials and regulatory reviews;•
              
              our
      dependence on a limited number of therapeutic
compounds;•
              
              the
      early stage of the products we are developing;•
              
              the
      acceptance of any of our future products by physicians and
      patients;•
              
              competition
      and dependence on collaborative partners;•
              
              loss
      of key management or scientific personnel;•
              
              our
      ability to obtain adequate intellectual property protection and to enforce
      these rights;•
              
              our
      ability to avoid infringement of the intellectual property rights of
      others; and•
              
              the
      other factors and risks described under the section captioned “Risk
      Factors” as well as other factors not identified
  therein.
  Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, the factors discussed in this Quarterly Report on Form 10-Q, in
other filings with the SEC and in press releases and other public statements by
our officers throughout the year, could cause actual results or outcomes to
differ materially and/or adversely from those expressed in any forward-looking
statements made by us or on our behalf, and therefore we cannot guarantee future
results, levels of activity, performance or achievements and you should not
place undue reliance on any such forward-looking statements. We cannot give you
any assurance that such forward-looking statements will prove to be accurate and
such forward-looking events may not occur. In light of the significant
uncertainties inherent in such forward-looking statements, you should not regard
the inclusion of this information as a representation by us or any other person
that the results or conditions described in those statements or our objectives
and plans will be achieved.
 
 All subsequent forward-looking
statements attributable to us or any person acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained or referred
to herein. Unless required by U.S. federal securities laws and the
rules and regulations of the SEC, we do not undertake any obligation and
disclaim any intention to update or release publicly any revisions to these
forward-looking statements after the filing of this Quarterly Report to reflect
later events or circumstances or to reflect the occurrence of unanticipated
events or any other reason.
 -27-
  
  MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 Overview
 
 You should read the following
discussion in conjunction with our condensed consolidated financial statements
as of November 30, 2009, and the notes to such condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q. All
references to “the Company”, “we”, “our” and “us” include the activities of
Raptor Pharmaceutical Corp. and its wholly-owned subsidiaries, Raptor
Pharmaceuticals Corp., TPTX, Inc., Raptor Discoveries Inc. (f/k/a Raptor
Pharmaceutical Inc.) or Raptor Discoveries and Raptor Therapeutics Inc. (f/k/a
Bennu Pharmaceuticals Inc.) or Raptor Therapeutics. This “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section contains forward-looking statements. Please see “Forward-Looking
Statements” for a discussion of the uncertainties, risks and assumptions
associated with these statements. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed below and
elsewhere in this Quarterly Report on Form 10-Q, particularly under the heading
“Risk Factors.”
 
 We
believe that we are building a balanced pipeline of drug candidates that may
expand the reach and benefit of existing therapeutics. Our product portfolio
includes both candidates from our proprietary drug targeting platforms and
in-licensed and acquired product candidates.
 
 Our current pipeline includes three
clinical development programs which we are actively developing. We also have
three other clinical-stage product candidates, for which we are seeking business
development partners but are not actively developing, and we have four
preclinical product candidates we are developing, three of which are based upon
our proprietary drug-targeting platforms.
  Clinical Development
Programs
 
 Our three active clinical development
programs are based on an existing therapeutic that we are reformulating for
potential improvement in safety and/or efficacy and for application in new
disease indications. These clinical development programs include the
following:
 
 •
              
              DR
      Cysteamine for the potential treatment of nephropathic cystinosis, or
      cystinosis, a rare genetic disorder;•
              
              DR
      Cysteamine for the potential treatment of non-alcoholic steatohepatitis,
      or NASH, a metabolic disorder of the liver; and•
              
              DR
      Cysteamine for the potential treatment of Huntington’s Disease, or
      HD.
  Other Clinical-Stage Product
Candidates
 
 We have three clinical-stage product
candidates for which we are seeking partners:
 
 •
              
              ConviviaTM
      for the potential management of acetaldehyde toxicity due to alcohol
      consumption by individuals with aldehyde dehydrogenase, or ALDH2
      deficiency, an inherited metabolic disorder; and•
              
              Tezampanel
      and NGX426, non-opioids for the potential treatment of migraine, acute
      pain, and chronic pain.
  Preclinical Product
Candidates
 
 Our preclinical platforms consist of
targeted therapeutics, which we are developing for the potential treatment of
multiple indications, including liver diseases, neurodegenerative diseases and
breast cancer:
 
 Our receptor-associated protein, or
RAP, platform consists of: HepTideTM for the potential treatment of primary liver
cancer and hepatitis C; and NeuroTransTM to potentially deliver therapeutics
across the blood-brain barrier for treatment of a variety of neurological
diseases.
 
 Our mesoderm development protein, or
Mesd, platform consists of WntTideTM for the potential treatment of breast
cancer.
 
 We are also examining our glutamate
receptor antagonists, tezampanel and NGX426, for the potential treatment of
thrombosis disorder.
 
 
 
 -28-
  
  
 Future
Activities
 
 Over the next 12 months, we plan to
conduct research and development activities based upon our DR Cysteamine
clinical programs and continued development of our preclinical product
candidates. We also plan to seek business development partners for our
ConviviaTM
product candidate and Tezampanel and NGX426. We may also develop future
in-licensed technologies and acquired technologies. A brief summary of our
primary objectives in the next 12 months for our research and development
activities is provided below. There can be no assurances that our research and
development activities will be successful. Our plans for research and
development activities over the next 12 months can only be implemented if we are
successful in raising significant funds during this period. If we do not raise
significant additional funds, we may not be able to continue as a going
concern.
  Clinical
Development Programs
 
 We develop clinical-stage drug product
candidates which are: internally discovered therapeutic candidates based on our
novel drug delivery platforms and in-licensed or purchased clinical-stage
products which may be new chemical entities in mid-to-late stage clinical
development, currently approved drugs with potential efficacy in additional
indications, and treatments that we could repurpose or reformulate as
potentially more effective or convenient treatments for a drug’s currently
approved indications.
  Development of DR Cysteamine for the
Potential Treatment of Nephropathic Cystinosis or Cystinosis
  Our DR Cysteamine product candidate is
a proprietary delayed-release, enteric-coated microbead formulation of
cysteamine bitartrate contained in a gelatin capsule. We are investigating DR
Cysteamine for the potential treatment of cystinosis.
 
 We believe that immediate-release
cysteamine bitartrate, a cystine-depleting agent, is currently the only U.S.
Food and Drug Administration, or FDA, and the European Medicines Agency, or
EMEA, approved drug to treat cystinosis, a rare genetic disease.
Immediate-release cysteamine is effective at preventing or delaying kidney
failure and other serious health problems in cystinosis patients. However,
patient compliance is challenging due to the requirement for frequent dosing and
gastrointestinal side effects. Our DR Cysteamine for the potential treatment of
cystinosis is designed to mitigate some of these difficulties. It is expected to
be dosed twice daily, compared to the current every-six-hour dosing schedule. In
addition, DR Cysteamine is designed to pass through the stomach and deliver the
drug directly to the small intestine, where it is more easily absorbed into the
bloodstream and may result in fewer gastrointestinal side effects.
 
 The FDA granted orphan drug designation
for DR Cysteamine for the treatment of cystinosis in 2006.
 
 In June 2009, we commenced our Phase
IIb clinical trial of DR Cysteamine in cystinosis, in which we enrolled nine
cystinosis patients with histories of compliance using the currently available
immediate-release form of cysteamine bitartrate. The clinical trial, which was
conducted at the University of California at San Diego, or UCSD, evaluated
safety, tolerability, pharmacokinetics and pharmacodynamics of a single dose of
DR Cysteamine in patients. In November 2009, we released the data from the study
which indicated improved tolerability and the potential to reduce total daily
dosage and administration frequency compared to immediate-release cysteamine
bitartrate. We plan to follow the Phase IIb clinical study with a pivotal Phase
III clinical study in cystinosis patients anticipated to commence in the first
quarter of 2010. While we plan to commercialize DR Cysteamine in the U.S. by
ourselves, we are actively negotiating a potential development partner for DR
Cysteamine for markets outside of the U.S.
  Development of DR Cysteamine for the
Potential Treatment of Non-Alcoholic Steatohepatitis or NASH
 
 In October 2008, we commenced a
clinical trial in collaboration with UCSD to investigate a prototype formulation
of DR Cysteamine for the treatment of NASH in juvenile patients. In October
2009, we announced positive findings from the completed treatment phase of this
open-label Phase IIa clinical trial. At the completion of the initial six-month
treatment phase, the study achieved the primary endpoint: mean blood levels of
alanine aminotransferase, or ALT, a common biomarker for NASH, were reduced by
over 50%. Additionally, over half of the study participants had achieved
normalized ALT levels by the end of the treatment phase.
 
 There are no currently approved drug
therapies for NASH, and patients are limited to lifestyle changes such as diet,
exercise and weight reduction to manage the disease. DR Cysteamine may provide a
potential treatment option for patients with NASH. Although NASH is most common
in insulin-resistant obese adults with diabetes and abnormal serum lipid
profiles, its prevalence is increasing among juveniles as obesity rates rise
within this patient population. Although most patients are asymptomatic and feel
healthy, NASH causes decreased liver function and can lead to cirrhosis, liver
failure and end-stage liver disease.
 
 -29-
  
  
 The NASH trial entails six months of
treatment followed by a six-month post-treatment monitoring period. Eligible
patients with baseline ALT and aspartate aminotransferase or AST measurements at
least twice that of normal levels were enrolled to receive twice-daily,
escalating oral doses of up to 1,000 mg of DR Cysteamine. The trial currently
has enrolled eleven NASH patients between 11-18 years old. No major adverse
events were reported during the six-month treatment phase. Trial subjects
continue to be monitored during the six-month post-treatment period currently
underway. Full results are being submitted for peer review by UCSD and us and
are expected to be presented in 2010.
  Development of DR Cysteamine for the
Potential Treatment of Huntington’s Disease or HD
  Huntington’s Disease, or HD, is a
fatal, inherited degenerative neurological disease affecting about 30,000 people
in the U.S. and a comparable number of people in Europe. We are not aware of any
treatment for HD other than therapeutics that minimize symptoms such as the
uncontrollable movements and mood swings resulting from HD. We are collaborating
with a French institution, CHU d’ Angers, on a Phase II clinical trial
investigating DR Cysteamine in HD patients, anticipated to begin in early 2010.
We are providing the clinical trial materials for the study, which is sponsored
by CHU d’ Angers and funded in part by a grant from the French government. We
were granted Orphan Drug Designation in the U.S. by the FDA for cysteamine as a
potential treatment for HD in 2008.
  Other Clinical-Stage Product
Candidates
 
 We have three clinical-stage product
candidates for which we are seeking partners.
  ConviviaTM
for Liver Aldehyde
Dehydrogenase Deficiency
 
 ConviviaTM is our proprietary oral
formulation of 4-methylpyrazole, or 4-MP, intended for the potential treatment
of acetaldehyde toxicity resulting from alcohol consumption in individuals with
ALDH2 deficiency, which is an inherited disorder of the body’s ability to
breakdown ethanol, commonly referred to as alcohol intolerance. 4-MP is
presently marketed in the U.S. and E.U. in an intravenous form as an anti-toxin.
ConviviaTM is
designed to lower systemic levels of acetaldehyde (a carcinogen) and reduce
symptoms, such as tachycardia and flushing, associated with alcohol consumption
by ALDH2-deficient individuals.
 
 ConviviaTM is a
capsule designed to be taken approximately 30 minutes prior to consuming an
alcoholic beverage.
 
 In 2008, we completed a Phase IIa dose
escalation clinical trial of oral 4-MP with ethanol in ALDH2 deficient patients.
The study results demonstrated that the active ingredient in ConviviaTM
significantly reduced heart palpitations (tachycardia), which are commonly
experienced by ALDH2 deficient people who drink, at all dose levels tested. The
study also found that the 4-MP significantly reduced peak acetaldehyde levels
and total acetaldehyde exposure in a subset of the study participants who
possess specific genetic variants of the liver ADH and ALDH2 enzymes. We believe
that this subset represents approximately one-third of East Asian populations.
We are actively seeking corporate partnerships with pharmaceutical companies in
selected Asian countries to continue clinical development of ConviviaTM in
those countries.
  Tezampanel and NGX426 for the
Potential Treatment of Migraine and Pain
 
 Tezampanel and NGX426, the oral prodrug
of tezampanel, are what we believe to be first-in-class compounds that may
represent novel treatments for both pain and non-pain indications. Tezampanel
and NGX426 are receptor antagonists that target and inhibit a specific group of
receptors—the AMPA and kainate glutamate receptors—found in the brain and other
tissues. While normal glutamate production is essential, excess glutamate
production, either through injury or disease, has been implicated in a number of
diseases and disorders. Published data show that during a migraine, increased
levels of glutamate activate AMPA and kainate receptors, result in the
transmission of pain and, in many patients, the development of increased pain
sensitivity. By acting at both the AMPA and kainate receptor sites to
competitively block the binding of glutamate, tezampanel and NGX426 have the
potential to treat a number of diseases and disorders. These include chronic
pain, such as migraine and neuropathic pain, muscle spasticity and a condition
known as central sensitization, a persistent and acute sensitivity to
pain.
 
 Results of a Phase IIb clinical trial
of tezampanel were released in October 2007. In the trial, a single dose of
tezampanel given by injection was statistically significant compared to placebo
in treating acute migraine headache. This was the sixth Phase II trial in which
tezampanel has been shown to have analgesic activity. Based on a review of the
Phase II data, the FDA previously agreed that tezampanel may move forward into a
Phase III program for acute migraine.
 
 In December 2008, results of NGX426 in
a human experimental model of cutaneous pain, hyperalgesia and allodynia
demonstrated a statistically significant reduction in spontaneous pain,
hyperalgesia and allodynia compared to placebo following injections of capsaicin
(i.e., chili oil) under the skin. In February 2009, results from a Phase 1
multiple dose trial of NGX426 showed that the compound is safe and
well-tolerated in healthy male and female subjects when dosed once daily for
five consecutive days.
 
 -30-
  
  
 In November 2009, we announced the
presentation of clinical trial data on NGX426 at the 12th International
Conference on the Mechanisms and Treatment of Neuropathic Pain. The results of
the study led by Mark Wallace, M.D., Professor of Clinical Anesthesiology at the
Center for Pain Medicine of the University of California at San Diego, suggested
that NGX426 has the potential to be effective in a variety of
neuropathic pain states, which are caused by damage to or dysfunction of the
peripheral or central nervous system rather than stimulation of pain
receptors.
  We are currently seeking program
funding, development collaborations or out-licensing partners for the migraine
and pain programs.
   Preclinical
Product Candidates
 
 We are also developing a drug-targeting
platform based on the proprietary use of RAP and Mesd. We believe that these
proteins may have therapeutic applications in cancer, infectious diseases and
neurodegenerative diseases, among others.
 
 These applications are based on the
assumption that our targeting molecules can be engineered to bind to a selective
subset of receptors with restricted tissue distribution under particular
conditions of administration. We believe these selective tissue distributions
can be used to deliver drugs to the liver or to other tissues, such as the
brain.
 
 In addition to selectively transporting
drugs to specific tissues, selective receptor binding constitutes a means by
which receptor function might be specifically controlled, either through
modulating its binding capacity or its prevalence on the cell surface. Mesd is
being engineered for this latter application.
  HepTideTM
for Hepatocellular Carcinoma
and Hepatitis C
 
 Drugs currently used to treat primary
liver cancer are often toxic to other organs and tissues. We believe that the
pharmacokinetic behavior of RAP (i.e., the determination of the fate or
disposition of RAP once administered to a living organism) may diminish the
non-target toxicity and increase the on-target efficacy of attached
therapeutics.
 
 In preclinical studies of our
radio-labeled HepTideTM (a
variant of RAP), HepTideTM, our
proprietary drug-targeting peptide was shown to distribute predominately to the
liver. Radio-labeled HepTideTM
which was tested in a preclinical research model of HCC, at the National
Research Council in Winnipeg, Manitoba, Canada, showed 4.5 times more delivery
to the liver than the radio-labeled control. Another study of radio-labeled
HepTideTM in a
non-HCC preclinical model, showed 7 times more delivery to the liver than the
radio-labeled control, with significantly smaller amounts of radio-labeled
HepTideTM
delivery to other tissues and organs.
 
 HCC is caused by the malignant
transformation of hepatocytes, epithelial cells lining the vascular sinusoids of
the liver, or their progenitors. HepTideTM has
shown to bind to lipoprotein receptor-related protein, or LRP1, receptors on
hepatocytes. We believe that the pharmacokinetics and systemic toxicity of a
number of potent anti-tumor agents may be controlled in this way.
 
 There are additional factors that favor
the suitability of RAP as an HCC targeting agent:
 
 •
              
              RAP
      is captured by hepatocytes with efficiency, primarily on
      first-pass.•
              
              Late-stage
      HCC is perfused exclusively by the hepatic artery, while the majority of
      the liver is primarily perfused through the portal
  vein.
 
 Studies have shown that the RAP
receptor, LRP1, is well expressed on human HCC and under-expressed on
non-cancerous, but otherwise diseased, hepatocytes. Also, LRP1 expression is
maintained on metastasized HCC. These factors will favor delivery of RAP
peptide-conjugated anti-tumor agents to tumor cells, whether in the liver or at
metastasized sites.
 
 We are evaluating conjugates between
HepTideTM and
a chemotherapeutic for testing in vitro and in appropriate preclinical models
for the potential treatment of HCC.
  We are also evaluating conjugates
between HepTideTM and
an antiviral agent for testing in vitro and in appropriate preclinical models
for the potential treatment of hepatitis C.
   NeuroTransTM
for the Potential Treatment of
Diseases Affecting the Brain
 
 Hundreds of known genetic and
neurodegenerative diseases affect the brain. Drugs often have difficulty
reaching these disease-affected areas because the brain has evolved a protective
barrier, commonly referred to as the blood-brain barrier.
 -31-
 Part of the solution to the medical
problem of neurodegenerative diseases is the creation of effective brain
targeting and delivery technologies. One of the most obvious ways of delivering
therapeutics to the brain is via the brain’s extensive vascular network.
Treating these diseases by delivering therapeutics into the brain in a minimally
invasive way, including through a natural receptor mediated transport mechanism
called transcytosis, is a vision shared by many researchers and clinicians in
the neuroscience and neuromedical fields.
 
 NeuroTransTM is our proprietary
RAP-based technology program to research the delivery of therapeutics across the
blood-brain barrier. We believe our NeuroTransTM platform may provide therapies
that will be safer, less intrusive and more effective than current approaches in
treating a wide variety of brain disorders.
 
 In preclinical studies, NeuroTransTM has
been conjugated to a variety of protein drugs, including enzymes and growth
factors, without interfering with the function of either fusion partner. Studies
indicate that radio-labeled NeuroTransTM may be transcytosed across the
blood-brain barrier and that fusions between NeuroTransTM and therapeutic
proteins may be manufactured economically. Experiments conducted in
collaboration with Stanford University in 2008 support the NeuroTransTM peptide’s
ability to enhance the transport of cargo molecules into the cells that line the
blood-brain barrier.
 
 In June 2009, we entered into a
collaboration and licensing agreement with F. Hoffman — La Roche Ltd. and
Hoffman—La Roche Inc., or Roche, to evaluate therapeutic delivery across the
blood-brain barrier utilizing NeuroTransTM. Under terms of the agreement, Roche
has funded studies of select molecules attached to NeuroTransTM. The agreement
provides Roche with an exclusive worldwide license to NeuroTransTM for use in the
delivery of diagnostic and therapeutic molecules across the blood-brain barrier.
Roche’s and our scientists will actively collaborate on the project. We have
received an initial upfront payment for the collaboration to cover our portion
of the initial studies, and may earn development milestone payments and
royalties in exchange for the licensing of NeuroTransTM to Roche.
  WntTideTM
for the Potential Treatment of
Cancer
 
 Human Mesd is a natural inhibitor of
the receptor LRP6. LRP6 has recently been shown to play a role in the
progression of some breast tumors. Studies in the laboratory of Professor Guojun
Bu, one of our scientific advisors, at the Washington
 University
in St. Louis Medical School support the potential of Mesd and related peptides
to target these tumors. These molecules and applications are licensed to us from
Washington University.
 
 WntTideTM is our proprietary, Mesd-based
peptide that we are developing as a potential therapeutic to inhibit the growth
and metastasis of tumors over-expressing LRP5 or LRP6. We have licensed the use
of Mesd from Washington University in St. Louis for the potential treatment of
cancer and bone density disorders.
 
 In April 2009, Washington University
conducted a preclinical study of WntTideTM in a breast cancer model which showed
tumor inhibition. The results of this study were presented at the 2nd Annual Wnt
Conference in Washington, D.C., in June 2009 and will likely be published in the
first quarter of 2010. We are currently planning another breast tumor
preclinical model study with researchers at Washington University in the
continued development of WntTideTM.
  Tezampanel and NGX426 for the
Potential Treatment of Thrombotic Disorder
  Research conducted at Johns Hopkins
University, or JHU, by Craig Morrell, D.V.M., Ph.D., and Charles Lowenstein,
M.D. demonstrated the importance of glutamate release in promoting platelet
activation and thrombosis. Research shows that platelets treated with an
AMPA/kainate receptor antagonist such as tezampanel or NGX426 are more resistant
to glutamate-induced aggregation than untreated platelets. This identifies the
AMPA/kainate receptors on platelets targeted by tezampanel or NGX426 as a new
antithrombotic target with a different mechanism of action than Plavix®,
aspirin or tPA. We have licensed the intellectual property of Tezampanel and NGX
426 for the treatment of thrombotic disorder from JHU and are in discussions
with potential collaborators regarding the development of this product
candidate.
  Other Development
Areas
  Securing Additional and
Complementary Technology Licenses from Others
 
 We plan to establish additional
research collaborations with prominent universities and research labs currently
working on the development of potential targeting molecules, and to secure
licenses from these universities and labs for technology resulting from the
collaboration. No assurances can be made regarding our ability to establish such
collaborations over the next 12 months, or at all. We intend to focus our
in-licensing and product candidate acquisition activities on identifying
complementary therapeutics, therapeutic platforms that offer a number of
therapeutic targets, and clinical-stage therapeutics based on existing approved
drugs in order to create proprietary reformulations to improve safety and
efficacy or to expand such drugs’ clinical indications through additional
clinical trials. We may obtain these products through collaborations, joint
ventures or through merger and/or acquisitions with other biotechnology
companies.
 
 -32-
 Strategic
Acquisitions
 
 Reverse
Merger with Raptor Pharmaceuticals Corp.
 
 In July 2009, we, and our then
wholly-owned subsidiary ECP Acquisition, Inc., a Delaware corporation, or merger
sub, entered into an Agreement and Plan of Merger and Reorganization, or the
2009 Merger Agreement, with Raptor Pharmaceuticals Corp., a Delaware
corporation. On September 29, 2009, on the terms and subject to the conditions
set forth in the 2009 Merger Agreement, merger sub was merged with and into
Raptor Pharmaceuticals Corp. and Raptor Pharmaceuticals Corp. survived such
merger as our wholly-owned subsidiary. This merger is referred to herein as the
2009 Merger.  Immediately prior to the 2009 Merger and in connection
therewith, we effected a 1-for-17 reverse stock split of our common stock and
changed our corporate name to “Raptor Pharmaceutical Corp.”
 
 As of immediately following the
effective time of the 2009 Merger, Raptor Pharmaceuticals Corp.’s stockholders
(as of immediately prior to such 2009 Merger) owned approximately 95% of our
outstanding common stock and our stockholders owned approximately 5% of our
outstanding common stock, in each case without taking into account any of our or
Raptor Pharmaceuticals Corp.’s shares of common stock, respectively, that were
issuable pursuant to outstanding options or warrants of ours or Raptor
Pharmaceuticals Corp., respectively, outstanding as of the effective time of the
2009 Merger. Although Raptor Pharmaceuticals Corp. became our wholly-owned
subsidiary, Raptor Pharmaceuticals Corp. was the “accounting acquirer” in the
2009 Merger and its board of directors and officers manage and operate the
combined company. Our common stock currently trades on The NASDAQ Capital Market
under the ticker symbol, “RPTP.”
 
 Purchase
of ConviviaTM
 
 In October 2007, prior to the 2009
Merger, Raptor Pharmaceuticals Corp. purchased certain assets of Convivia, Inc.,
or Convivia, including intellectual property, know-how and research reports
related to a product candidate targeting liver ALDH2 deficiency, a genetic
metabolic disorder. Raptor Pharmaceuticals Corp. hired Convivia’s chief
executive officer and founder,
 Thomas E.
(Ted) Daley, as the President of its clinical development division. In exchange
for the assets related to the ALDH2 deficiency program, what we now call
ConviviaTM,
Raptor Pharmaceuticals Corp. issued to Convivia 200,000 shares of its common
stock, an additional 200,000 shares of its common stock to a third party in
settlement of a convertible loan between the third party and Convivia, and
another 37,500 shares of its common stock in settlement of other obligations of
Convivia. Mr. Daley, as the former sole stockholder of Convivia, may earn
additional shares of our common stock based on certain triggering events or
milestones related to the development of the 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 as a result of the milestone of our
execution of a formulation agreement for manufacturing ConviviaTM with
Patheon. In March 2008, Raptor Pharmaceuticals Corp. issued to Mr. Daley 100,000
shares of its common stock pursuant to the Convivia purchase agreement as a
result of the milestone of our execution of an agreement to supply us with the
active pharmaceutical ingredient for ConviviaTM and
two $10,000 cash bonuses pursuant to his employment agreement for reaching his
six-month and one-year employment anniversaries. In October 2008, Raptor
Pharmaceuticals Corp. issued to Mr. Daley 100,000 shares of its common stock
valued at $27,000 and a $30,000 cash bonus as a result of fulfilling a clinical
milestone.   Due to the 2009 Merger, the 200,000, 200,000,
37,500, 100,000 and 100,000 shares Raptor Pharmaceuticals Corp., respectively,
described above, became 46,625, 46,625, 8,742, 23,312 and 23,312 shares of our
common stock, respectively.
 
 Purchase
of DR Cysteamine
 
 In
December 2007, prior to the 2009 Merger, through a merger between Encode
Pharmaceuticals, Inc., or Encode, and Raptor Therapeutics, Raptor
Pharmaceuticals Corp. purchased certain assets, including the clinical
development rights to DR Cysteamine. Under the terms of and subject to the
conditions set forth in the merger agreement, Raptor Pharmaceuticals Corp.
issued 3,444,297 shares of its common stock to the stockholders of Encode, or
Encode Stockholders, options, or Encode Options, to purchase up to, in the
aggregate, 357,427 shares of its common stock to the optionholders of Encode, or
Encode Optionholders, and warrants, or Encode Warrants, to purchase up to, in
the aggregate, 1,098,276 shares of its common stock to the warrantholders of
Encode, or Encode Warrantholders, and together with the Encode Stockholders and
Encode Optionholders, referred to herein collectively as the Encode
Securityholders, as of the date of such agreement.  Due to the 2009
Merger, the 3,444,296 shares of Raptor Pharmaceuticals Corp.’s common stock, the
357,427 Encode Options and 1,098,276 Encode Warrants, respectively, became
802,946 shares of our common stock, Encode Options to purchase 83,325 shares of
our common stock and Encode Warrants to purchase 256,034 shares of our common
stock, respectively.  The Encode Securityholders are eligible to
receive up to an additional 559,496 shares of our common stock, Encode Options
and Encode Warrants to purchase our common stock in the aggregate based on
certain triggering events related to regulatory approval of DR Cysteamine, an
Encode product program, if completed within the five year anniversary date of
the merger agreement.
 
 As a result of the Encode merger, we
received the exclusive worldwide license to DR Cysteamine, referred to herein as
the License Agreement, developed by clinical scientists at the UCSD, School of
Medicine. In consideration of the grant of the license, we are obligated to pay
an annual maintenance fee of $15,000 until we begin commercial sales of any
products developed pursuant to the License Agreement. In addition to the
maintenance fee, we are obligated to pay during the life of the
License
 
 -33-
  
  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 we begin
commercially selling any products pursuant to the License Agreement, if ever.
Under the License Agreement, we are 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. In
addition, we are obligated, among other things, to spend annually at least
$200,000 for the development of products (which we satisfied, as of August 31,
2009 by spending approximately $4.1 million on such programs) pursuant to the
License Agreement. To-date, we have paid $270,000 in milestone payments to UCSD
based upon the initiation of clinical trials in cystinosis and in NASH. To the
extent that we fail to perform any of our obligations under the License
Agreement, UCSD may terminate the license or otherwise cause the license to
become non-exclusive.
 
 Application
of Critical Accounting Policies
 
 Our condensed consolidated financial
statements and accompanying notes are prepared in accordance with generally
accepted accounting principles used in the U.S. Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. These estimates and
assumptions are affected by management’s application of accounting policies. We
believe that understanding the basis and nature of the estimates and assumptions
involved with the following aspects of our consolidated financial statements is
critical to an understanding of our consolidated financial
position.
 
 We believe the following critical
accounting policies require us to make significant judgments and estimates in
the preparation of our consolidated financial statements.
 
 Fair
Value of Financial Instruments
 
 The carrying amounts of certain of our
financial instruments including cash and cash equivalents, prepaid expenses,
accounts payable, accrued liabilities and capital lease liability approximate
fair value due to their short maturities.
 
 Cash
and Cash Equivalents
 
 We consider all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
 
 Intangible
Assets
 
 Intangible assets include the
intellectual property and other rights relating to DR Cysteamine, to the RAP
technology and to the out-license and the rights to NGX 426 acquired in the 2009
Merger. The intangible assets related to DR Cysteamine and the RAP technology
are amortized using the straight-line method over the estimated useful life of
20 years, which is the life of the intellectual property patents. The 20 year
estimated useful life is also based upon the typical development, approval,
marketing and life cycle management timelines of pharmaceutical drug
products.  The intangible assets related to the out-license will be
amortized using the straight-line method over the estimated useful life of 16
years, which is the life of the intellectual property patents.  The
intangible assets related to NGX 426, which has been classified as in-process
research and development, will not be amortized until development is
completed.
  Goodwill
  Goodwill represents the excess of the
value of the purchase consideration over the identifiable assets acquired in the
2009 Merger.  Goodwill will be reviewed annually, or when an
indication of impairment exists,  to determine if any impairment
analysis and resulting write-down in valuation is necessary.
 
 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.
 
 Impairment
of Long-Lived Assets
 
 We evaluate our 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. We have not identified any
such impairment losses to
date.                     -34-
 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.
 
 Research
and Development
 
 We are an early development stage
company. Research and development costs are charged to expense as incurred.
Research and development expenses include scientists’ salaries, lab
collaborations, preclinical studies, clinical trials, clinical trial materials,
regulatory and clinical consultants, lab supplies, lab services, lab equipment
maintenance and small equipment purchased to support the research laboratory,
amortization of intangible assets and allocated executive, human resources and
facilities expenses.
 
 In-Process
Research and Development
 
 Prior to September 1, 2009, the Company
recorded in-process research and development expense for a product candidate
acquisition where there is not more than one potential product or usage for the
assets being acquired. Upon the adoption of the revised guidance on business
combinations, effective September 1, 2009, the fair value of acquired in-process
research and development is capitalized and tested for impairment at least
annually.  Upon completion of the research and development activities,
the intangible asset is amortized into earnings over the related products useful
life. The Company reviews each product candidate acquisition to determine the
existence of in-process research and development.
 
 Stock-Based
Compensation
 
 In May 2006, Raptor Pharmaceuticals
Corp.’s stockholders approved the 2006 Equity Compensation Plan, as amended,
referred to herein as the Plan. The Plan’s term is ten years and allows for the
granting of options to employees, directors and
consultants.  Effective as of the effective time of the 2009 Merger,
we assumed the outstanding stock options of Raptor Pharmaceuticals Corp. granted
under the Plan. Such assumed options are subject to the terms of the Plan and,
in each case, are also subject to the terms and conditions of an incentive stock
option agreement, non-qualified stock option agreement or other option award, as
the case may be, issued under such Plan. Prior to the 2009 Merger, and subject
to it becoming effective, our board of directors adopted the Plan such that the
Plan became an equity incentive plan of ours after the 2009
Merger.
 
 Typical option grants under the Plan
are for ten years with exercise prices at or above market price based on the
last closing price as of the date prior to the grant date on the relevant stock
market or exchange and vest over four years as follows: 6/48ths on the six month
anniversary of the date of grant; and 1/48th per month thereafter.
 
 Effective September 1, 2006, our
stock-based compensation is accounted for in accordance with Financial
Accounting Standards Board or FASB Accounting Standards Codification or ASC
Topic 718, Accounting for
Compensation Arrangements, or ASC 718 (previously listed as SFAS
No. 123 (revised 2004)), Share-Based Payment and
related interpretations. Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based on
the value of the award and is recognized as expense over the vesting period.
Determining the fair value of share-based awards at the grant date requires
judgment, including estimating future stock price volatility and employee stock
option exercise behavior. If actual results differ significantly from these
estimates, stock-based compensation expense and results of operations could be
materially impacted.
 
 In March 2005, the SEC issued ASC 718
(previously listed as Staff Accounting Bulletin, or SAB, No. 107, or SAB 107),
which offers guidance for what was previously referred to as SFAS 123(R). ASC
718 was issued to assist preparers by simplifying some of the implementation
challenges of SFAS 123(R) while enhancing the information that investors
receive. ASC 718 creates a framework that is premised on two overarching themes:
(a) considerable judgment will be required by preparers to successfully
implement SFAS 123(R), specifically when valuing employee stock options; and (b)
reasonable individuals, acting in good faith, may conclude differently on the
fair value of employee stock options. Key topics covered by ASC 718 include
valuation models, expected volatility and expected term.
 For the three month period ended
November 30, 2009, stock-based compensation expense was based on the
Black-Scholes option-pricing model assuming the following: risk-free interest
rate of 2.97%; 7 year expected life; 245.42% volatility; 10% turnover rate; and
0% dividend rate.
 
 We based our Black-Scholes inputs on
the following factors: the risk-free interest rate was based upon our review of
current constant maturity treasury bill rates for seven years; the expected life
was based upon our assessment of the ten-year term of the stock options issued
along with the fact that we are a development-stage company and our anticipation
that option holders will exercise stock options when the company is at a more
mature stage of development; the volatility was based on the actual volatility
of our common stock price as quoted on the over the counter bulletin board; the
turnover rate was based on our
 
 -35-
  
  assessment
of our size and the minimum potential for employee turnover at our current
development-stage; and the dividend rate was based on our current decision to
not pay dividends on our stock at our current development stage.
 
 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. See Note 8 of our condensed consolidated financial
statements for further discussion of our accounting for stock based
compensation.
 
 We recognize as consulting expense the
fair value of options granted to persons who are neither employees nor
directors. Stock options issued to consultants are accounted for 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). The fair value of expensed options is based
on the Black-Scholes option-pricing model assuming the same factors as
stock-based compensation expense discussed above.
 
 On November 10, 2005, FASB, issued ASC
718 (previously listed as FASB Staff Position, or FSP, No. FAS 123(R)-3 Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards). ASC 718
provides a practical transition election related to the accounting for the tax
effects of share-based payment awards to employees, as an alternative to the
transition guidance for the additional paid-in capital pool (APIC pool). The
alternative transition method includes simplified methods to establish the
beginning balance of the APIC pool related to the tax effects of employee
stock-based compensation, and to determine the subsequent impact on the APIC
pool and statements of cash flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of ASC 718. The guidance
in ASC 718 is effective after November 10, 2005. We may take up to one year from
the later of adoption of ASC 718 or the effective date of this section of ASC
718 to evaluate our available transition alternatives and make our one-time
election. We have elected the “short-form” method to calculating excess tax
benefits available for use in offsetting future tax shortfalls in accordance
with ASC 718.
 
 Results of
Operations
 
 Three
months ended November 30, 2009 and 2008
 
 General
and Administrative
 
 General and administrative expenses
(including officer and employee compensation allocated to general and
administrative expenses) for the three months ended November 30, 2009 increased
by $0.35 million compared to the same period of the prior year. The increase was
primarily due to (A) an increase of $0.09 million in investor relations expenses
related to additional investor mailings and news releases surrounding the 2009
Merger (B) $0.08 million in additional accounting fees incurred to value the
2009 Merger consideration, Sarbanes-Oxley compliance and other support related
to our footnote disclosures in our year-end financial statements, (C) an
increase of  $0.07 million in directors and officers insurance
incurred in connection with the 2009 Merger (D) $0.06 million in patent
application expenses, (E) an increase of $0.04 million in transfer agent fees
related to the 2009 Merger, and (F) a decrease in facilities and human resources
expenses allocated to research and development of $0.03 million due to the
reduction of headcount in the research and development department, and all of
which were partially offset by the decrease of non-cash compensation of $0.07
million representing a stock bonus earned in the prior year quarter but not
repeated the current quarter.
 
 Research
and Development
 
 Research and development expenses
(including officer and employee compensation allocated to research and
development) for the three months ended November 30, 2009 increased by $0.11
million over the prior year primarily due to (A) an increase of $0.54 million
for our Phase IIb clinical trial of DR Cysteamine in cystinosis patients,
including the cost of clinical material manufacturing and formulation, clinical
trial expenses, clinical trial monitoring fees and clinical material storage and
distribution fees, (B) an increase of $0.10 million in salaries and benefits due
to the hiring of our director of program management in October 2008 and our
Chief Medical Officer in April 2009, all of which were partially offset by (i) a
decrease of $0.18 million in milestone payments as the prior year quarter
included NASH related milestones and the current quarter only included a
milestone payment for the first patient dosed in our Phase IIb cystinosis trial
of $0.02 million, (ii) a decrease of $0.12 million in research and development
consulting for DR Cysteamine directly resulting from the hiring of our Chief
Medical Officer, (iii) a decrease of $0.11 million of preclinical studies
performed for NASH in the prior year quarter not repeated in the current
quarter, (iv) a decrease of $0.09 million in HepTide preclinical materials
incurred in the prior year quarter that was not repeated in the current quarter,
and (v) a reduction of $0.03 million of facilities and human resources expenses
allocated to research and development due to the reduction in research
personnel.
 
 
 
 -36-
  
  Research
and development expenses include the following: (in $ millions)
 Estimated
              
              Cumulative
      from September 8, 2005 (inception)
              
              Three
      Months Ended
              
              Three
      Months EndedMajor
      Program (stage of development)
              
              Next
                12
      Months
              
              Through
                November
      30, 2009
              
              November
      30, 2009
              
              November
      30, 2008DR
      Cysteamine — All Indications (clinical)
              
              
              7.8
              
              
              
              6.2
              
              
              
              1.2
              
              
              
              1.0ConviviaTM
      (clinical)
              
              
              0.1
              
              
              
              2.2
              
              
              
              0.1
              
              
              
              0.2HepTideTM
      (preclinical)
              
              
              0.1
              
              
              
              1.6
              
              
              
              —
              
              
              
              0.1NeuroTransTM
      (preclinical)
              
              
              —
              
              
              
              0.3
              
              
              
              —
              
              
              
              —WntTideTM
      (preclinical)
              
              
              —
              
              
              
              0.4
              
              
              
              0.1
              
              
              
              —Minor
      or Inactive Programs
              
              
              —
              
              
              
              0.7
              
              
              
              —
              
              
              
              —R
      & D Personnel and Other Costs Not Allocated to
Programs
              
              
              2.0
              
              
              
              5.4
              
              
              
              0.5
              
              
              
              0.5Total
      Research & Development Expenses
              
              
              10.0
              
              
              
              16.8
              
              
              
              1.9
              
              
              
              1.8
 
 Major
Program expenses recorded as general and administrative expenses: (in $
millions)
 
 Estimated
              
              Cumulative
      from September 8, 2005 (inception)
              
              Three
      Months Ended
              
              Three
      Months EndedMajor
      Program (stage of development)
              
              Next
      12
                Months
              
              Through
                November
      30, 2009
              
              November
      30, 2009
              
              November
      30, 2008DR
      Cysteamine — All Indications (clinical)
              
              
              0.10
              
              
              
              0.20
              
              
              
              —
              
              
              
              0.04ConviviaTM(clinical)
              
              
              0.01
              
              
              
              0.12
              
              
              
              0.03
              
              
              
              —HepTideTM
      (preclinical)
              
              
              0.04
              
              
              
              0.23
              
              
              
              0.06
              
              
              
              —NeuroTransTM (preclinical)
              
              
              0.03
              
              
              
              0.16
              
              
              
              0.01
              
              
              
              0.01WntTideTM (preclinical)
              
              
              0.01
              
              
              
              0.06
              
              
              
              —
              
              
              
              —
 
 Additional major program expenses
include patent fees and patent expenses which were recorded as general and
administrative expenses as these fees are to support patent applications (not
issued patents).
 
 Any of our major programs could be
partnered for further development and/or could be accelerated, slowed or ceased
due to scientific results or challenges in obtaining funding. We will need
significant additional funding in order to pursue our plans for the next 12
months. In addition, the timing and costs of development of our programs beyond
the next 12 months is highly uncertain and difficult to estimate. See Item 1A
titled Risk Factors for further discussion about the risks and uncertainties
pertaining to drug development.
 
 Current
Status of Major Programs
 
 Please refer to the section titled,
“Future Activities” above in this Quarterly Report on Form 10-Q for a detailed
discussion of each of our major programs. In summary, DR Cysteamine is being
developed in cystinosis, NASH and HD. In November 2009, we released data from
our Phase IIb clinical trial to study DR Cysteamine in cystinosis patients. In
October 2009, we announced the data from the treatment portion of our NASH Phase
IIa clinical trial. Our NASH clinical trial (post-treatment phase) is currently
ongoing. We anticipate studying DR Cysteamine in a Phase III clinical trial in
cystinosis patients and a Phase IIa clinical trial in HD patients in the first
quarter of 2010.
 
 Our ConviviaTMproduct candidate
completed its initial clinical study in 2008 and we are seeking to partner any
further development of our ConviviaTM
product candidate with an Asian company where its potential market exists. We
are seeking program funding for our Tezampanel and NGX426 product candidates and
no development costs will be incurred until such funding is obtained, if at all.
NeuroTransTM is
currently being studied under a collaboration agreement with Roche. HepTideTM and
WntTideTM are
undergoing preclinical proof of concept studies, which will require further
study prior to potentially moving into a clinical phase of
development.
 
 -37-
  
  Interest
Income
 
 Interest income decreased by $0.019
million during from the three months ended November 30, 2009 compared to the
same period of the prior year due to the significant decrease in money market
balances.
 
 Interest
Expense
 
 Interest expense for the three months
ended November 30, 2009 and 2008 were nominal.
 
 
 Liquidity
and Capital Resources
 
 Capital
Resource Requirements
 
 As of November 30, 2009, we had
approximately $1.2 million in cash, approximately $2.0 million in current
liabilities and approximately $(0.6) million of net working capital deficit. Our
forecasted average monthly cash expenditures for the next twelve months are
approximately $1.03 million.
 
 We
believe our cash and cash equivalents at November 30, 2009 along with the net
funds raised subsequent to quarter-end in December 2009 of approximately $6.9
million (see the subsequent event Note 12) will be sufficient to meet our
obligations into the third calendar quarter of 2010. We are currently in the
process of negotiating strategic partnerships and collaborations in order to
fund our preclinical and clinical programs into 2011. If we are not able to
close a strategic transaction, we anticipate raising additional capital through
an offering of our equity securities in the second calendar quarter of
2010.  If we do not enter into any such partnership or collaboration
agreement or equity offering, either of which will result in significant
additional capital for us in the next four months, we will be forced to scale
down our expenditures as described herein or possibly cease
operations.
 
 Our recurring losses from operations
and our accumulated deficit raise substantial doubt about our ability to
continue as a going concern and, as a result, our independent registered public
accounting firm included an explanatory paragraph in its report on our
consolidated financial statements for the year ended August 31, 2009 with
respect to this uncertainty. We will need to generate significant revenue or
raise additional capital to continue to operate as a going concern. In addition,
the perception that we may not be able to continue as a going concern may cause
others to choose not to deal with us due to concerns about our ability to meet
our contractual obligations and may adversely affect our ability to raise
additional capital.
 
 In
April 2009, in order to reflect then-current market prices, Raptor
Pharmaceuticals Corp. notified the holders of warrants purchased in the May/June
2008 private placement that it was offering, in exchange for such warrants, new
warrants to purchase its common stock at an exercise price of $0.30 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 warrants that were not exchanged prior to or on July
17, 2009 retained their original exercise prices of $0.90 per share and original
expiration date of May 21, 2010. Raptor Pharmaceuticals Corp. received
approximately $2.6 million of proceeds from warrant exercises that resulted in
the issuance of 8,715,000 shares of its common stock pursuant to the exchange
described above. On a post-2009 Merger basis, the warrants that were not
exchanged prior to or on July 17, 2009 are warrants to purchase shares of our
common stock at an exercise price of $3.86 per share and continue to have an
expiration date of May 21, 2010, and the 8,715,000 shares of Raptor
Pharmaceuticals Corp.’s common stock described above are 2,031,670 shares of our
common stock.
 
 In August 2009, Raptor Pharmaceuticals
Corp. entered into a Securities Purchase Agreement with four investors for the
private placement of units at a purchase price of $0.32 per unit, each unit was
comprised of one share of its common stock, par value $0.001 per share and one
warrant to purchase one half of one share of its common stock. At the closing,
Raptor Pharmaceuticals Corp. sold an aggregate of 7,456,250 units to the
investors, comprised of an aggregate of 7,456,250 shares of its common stock and
warrants to purchase up to in the aggregate, 3,728,125 shares of its common
stock, for aggregate gross proceeds of $2,386,000. The investor warrants,
exercisable for two years from the closing, had an exercise price of $0.60 per
share during the first year and $0.75 per share during the second year,
depending on when such investor warrants were exercised, if at
all.  On a post-2009 Merger basis, the 7,456,250 shares of Raptor
Pharmaceuticals Corp.’s common stock described above are 1,738,226 shares of our
common stock and the two-year warrants are warrants to purchase up to, in the
aggregate, 869,113 shares of our common stock and have an exercise price of
$2.57 per share during the first year and $3.22 per share during the second
year, depending on when such investor warrants are exercised, if at
all.
 
 In December 2009, we entered into a
definitive securities purchase agreement or the Purchase Agreement, dated as of
December 17, 2009, with 33 investors (collectively, the Investors) with respect
to the sale of Units, whereby, on an aggregate basis, the Investors agreed to
purchase 3,747,558 Units for a negotiated purchase price of $2.00 per Unit for
aggregate gross proceeds of approximately $7.5 million.  Each Unit
consists of one share of our common stock, one Series A Warrant exercisable for
0.5 of a share of our common stock and one Series B Warrant exercisable for 0.5
of a share of our common stock. The shares of our common stock and the Warrants
were issued separately.  The Series A Warrants will be exercisable
during the period
  -38-
   
  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.  In connection with this offering we paid a placement agent
cash compensation equal to 6.5% of the gross proceeds or $487,183 plus a
five-year warrant at an exercise price of $2.50 for the purchase of up to 74,951
shares of our common stock.
  There can be no assurance that we will
be able to obtain funds required for our continued operation. There can be no
assurance that additional financing will be available to us or, if available,
that it can be obtained on commercially reasonable terms. If we are not able to
obtain financing on a timely basis, we will not be able to meet our obligations
as they become due and we will be forced to scale down or perhaps even cease the
operation of our business. This also may be the case if we become insolvent or
if we breach our asset purchase agreement with BioMarin or our licensing
agreements with Washington University and UCSD due to non-payment (and we do not
cure our non-payment within the stated cure period). If this happens, we would
lose all rights to the RAP technology assigned to us by BioMarin and/or the
rights to Mesd licensed to us by Washington University and/or the rights to DR
Cysteamine licensed to us by UCSD, depending on which agreement is breached. If
we lose our rights to the intellectual property related to the RAP technology
purchased by us from BioMarin, our agreement with Roche would likely be
terminated and any milestone or royalty payments from Roche to us would
thereafter cease to accrue.
 
 We will need to raise significant
long-term financing in order to implement our 12 month operating plan. If we are
able to raise significant additional funding within the next four months, for
the next 12 months we intend to expend a total of approximately $12.4 million to
implement our operating plan of researching and developing our DR Cysteamine
clinical programs, our RAP based platform, our licensed technologies, as well as
continuing business development efforts for our other clinical-stage product
candidates.
 
 Specifically, we estimate our operating
expenses and working capital requirements for the next 12 months to be as
follows:
 
 Estimated
      spending for the next 12 months:Research
      and development activities
              
              $
              8,430,000Research
      and development compensation and benefits
              
              
              1,550,000General
      and administrative activities
              
              
              1,400,000General
      and administrative compensation and benefits
              
              
              1,000,000Capital
      expenditures
              
              
              20,000Total
      estimated spending for the next 12 months
              
              $
              12,400,000
 
 We anticipate that we will not be able
to generate revenues from the sale of products until we further develop our drug
product candidates and obtain the necessary regulatory approvals to market our
future drug product candidates, which could take several years or more, if we
are able to do so at all. Accordingly, our cash flow projections are subject to
numerous contingencies and risk factors beyond our control, including
successfully developing our drug product candidates, market acceptance of our
drug product candidates, competition from well-funded competitors, and our
ability to manage our expected growth. It is likely that for many years, we will
not be able to generate internal positive cash flow from the sales of our drug
product candidates sufficient to meet our operating and capital expenditure
requirements.
 
 There
is substantial doubt about our ability to continue as a going concern as the
continuation of our business is dependent upon obtaining further long-term
financing, the successful development of our drug product candidates and related
technologies, the successful and sufficient market acceptance of any product
offerings that we may introduce and, finally, the achievement of a profitable
level of operations. The issuance of additional equity securities by us is
likely to result in a significant dilution in the equity interests of our
current stockholders. Obtaining commercial loans, assuming those loans would be
available, including on acceptable terms, will increase our liabilities and
future cash commitments.
 
 Research and
Development Activities
 
 We plan to conduct further research and
development, seeking to support several clinical trials for DR Cysteamine,
improve upon our RAP-based and in-licensed technology and continue business
development efforts for our other clinical-stage product candidates in the next
12 months. We plan to conduct research and development activities by our own
laboratory staff and also by engaging contract research organizations, clinical
research organizations and contract manufacturing organizations. We also plan to
incur costs for the production of our clinical study drug candidate, DR
Cysteamine, clinical trials, clinical and medical advisors and consulting and
collaboration fees. Assuming we obtain additional long-term financing, we
anticipate our research and development costs for the next 12 months, excluding
in-house research and development compensation, will be approximately $8.43
million. We will need to scale down our research and development plans and
expenses detailed herein in the 12 months if we are not able to raise
significant additional funding over the next four months as detailed in the
section titled, “Capital Resource Requirements.”
 -39-
 Officer
and Employee Compensation
 
 In addition to the three officers of
TPTX, Inc., we currently employ five executive officers. We also have one
permanent scientific staff member, two permanent clinical development staff
members and one permanent finance staff member. Assuming we obtain significant
additional long-term financing, we anticipate spending up to approximately $2.55
million in officer and employee compensation during the next 12 months, of which
$1.55 million is allocated to research and development expenses, $0.71 million
is allocated to general and administrative expenses and $0.29 million is related
to the TPTX, Inc. personnel and is allocated to general and administrative
expenses. Cash received as a result of the 2009 Merger is sufficient to cover
the TPTX, Inc. personnel expense obligations. We will need to scale down our
officer and employee compensation expenses detailed herein in the next 12 months
if we are not able to raise significant additional funding over the next four
months as detailed in the section titled, “Capital Resource
Requirements.”
 
 General
and Administrative
 
 Assuming we obtain additional long-term
financing, we anticipate spending approximately $1.40 million on general and
administrative costs in the next 12 months. These costs will consist primarily
of legal and accounting fees, patent legal fees, investor relations expenses,
board fees and expenses, insurance, rent and facility support expenses,
excluding finance and administrative compensation. We will need to scale down
our general and administrative plans and expenses detailed herein in the next 12
months if we are not able to raise significant additional funding over the next
four months as detailed in the section titled, “Capital Resource
Requirements.”
 
 Capital
Expenditures
 
 We anticipate spending approximately
$20,000 in the next 12 months on capital expenditures for lab equipment and
office furniture. We will need to scale down our capital expenditures detailed
herein in the next 12 months if we are not able to raise significant additional
funding over the next four months as detailed in the section titled, “Capital
Resource Requirements.”
 
 Contractual
Obligations with BioMarin
 
 Pursuant to the terms of the asset
purchase agreement we entered into with BioMarin for the purchase of
intellectual property related to our RAP based technology (including
NeuroTransTM), we
are obligated to make the following milestone payments to BioMarin upon the
achievement of the following events:
 
 •
              
              $50,000
      (paid by us in June 2006) within 30 days after we receive total aggregate
      debt or equity financing of at least $2,500,000;•
              
              $100,000
      (paid by us in June 2006) within 30 days after we receive total aggregate
      debt or equity financing of at least $5,000,000;•
              
              $500,000
      upon our filing and acceptance of an investigational new drug application
      for a drug product candidate based on our NeuroTransTM
      product candidate;•
              
              $2,500,000
      upon our successful completion of a Phase II human clinical trial for a
      drug product candidate based on our NeuroTransTM
      product candidate;•
              
              $5,000,000
      upon our successful completion of a Phase III human clinical trial for a
      drug product candidate based on our NeuroTransTM
      product candidate;•
              
              $12,000,000
      within 90 days of our obtaining marketing approval from the FDA or other
      similar regulatory agencies for a drug product candidate based on our
      NeuroTransTM
      product candidate;•
              
              $5,000,000
      within 90 days of our obtaining marketing approval from the FDA or other
      similar regulatory agencies for a second drug product candidate based on
      our NeuroTransTM
      product candidate;•
              
              $5,000,000
      within 60 days after the end of the first calendar year in which our
      aggregated revenues derived from drug product candidates based on our
      NeuroTransTM
      product candidate exceed $100,000,000; and•
              
              $20,000,000
      within 60 days after the end of the first calendar year in which our
      aggregated revenues derived from drug product candidates based on our
      NeuroTransTM
      product candidate exceed
$500,000,000.
 
 In addition to these milestone
payments, we are also obligated to pay BioMarin a royalty at a percentage of our
aggregated revenues derived from drug product candidates based on our
NeuroTransTM
product candidate. On June 9, 2006, we made a milestone payment in the amount of
$150,000 to BioMarin because we raised $5,000,000 in our May 25, 2006
private
 
 -40-
  
  placement
financing. If we become insolvent or if we breach our asset purchase agreement
with BioMarin due to non-payment and we do not cure our non-payment within the
stated cure period, all of our rights to RAP technology (including
NeuroTransTM)
will revert back to BioMarin.
 
 Contractual
Obligations with Thomas E. Daley (assignee of the dissolved Convivia,
Inc.)
 
 Pursuant to the terms of the asset
purchase agreement, or the Asset Purchase Agreement, that we entered into with
Convivia, Inc. and Thomas E. Daley, pursuant to which we purchased intellectual
property related to our 4-MP product candidate program, Mr. Daley will be
entitled to receive the following, if at all, in such amounts and only to the
extent certain future milestones are accomplished by us, as set forth
below:
 
 •
              
              23,312
      shares of our restricted, unregistered common stock within fifteen (15)
      days after we enter into a manufacturing license or other agreement to
      produce any product that is predominantly based upon or derived from any
      assets purchased from Convivia, or Purchased Assets, in quantity, referred
      to as Product, if such license agreement is executed within one (1) year
      of execution of the Asset Purchase Agreement or, if thereafter, 11,656
      shares of our restricted, unregistered common stock. Should we obtain a
      second such license or agreement for a Product, Mr. Daley will be entitled
      to receive 11,656 shares of our restricted, unregistered common stock
      within 30 days of execution of such second license or other agreement. On
      March 31, 2008, Raptor Pharmaceuticals Corp. issued 100,000 shares of its
      common stock valued at $56,000 to Mr. Daley pursuant to this milestone
      reflecting the execution of an agreement to supply the active
      pharmaceutical ingredient for ConviviaTM
      , combined with the execution of a formulation agreement to produce the
      oral formulation of ConviviaTM. Due to the 2009
      Merger, the 100,000 shares Raptor Pharmaceuticals Corp. described above
      became 23,312 shares of our common stock.•
              
              23,312
      shares of our restricted, unregistered common stock within fifteen (15)
      days after we receive our first patent allowance on any patents which
      constitute part of the Purchased Assets in any one of certain
      predetermined countries, or Major Market.•
              
              11,656
      shares of our restricted, unregistered common stock within fifteen (15)
      days after we receive our second patent allowance on any patents which
      constitute part of the Purchased Assets different from the patent
      referenced in the immediately preceding bullet point above in a Major
      Market.•
              
              23,312
      shares of our restricted, unregistered common stock within fifteen (15)
      days of completion of predetermined benchmarks in a Major Market by us or
      our licensee of the first phase II human clinical trial for a Product, or
      Successful Completion if such Successful Completion occurs within one (1)
      year of execution of the Asset Purchase Agreement or, if thereafter,
      11,656 shares of our restricted, unregistered common stock within thirty
      (30) days of such Successful Completion. In October 2008, Raptor
      Pharmaceuticals Corp. issued 100,000 shares of its common stock valued at
      $27,000 and a $30,000 cash bonus (pursuant to Mr. Daley’s employment
      agreement) to Mr. Daley pursuant to the fulfillment of this
      milestone.  Due to the 2009 Merger, the 100,000 shares Raptor
      Pharmaceuticals Corp. described above became 23,312 shares of our common
      stock.•
              
              11,656
      shares of our restricted, unregistered common stock within fifteen (15)
      days of a Successful Completion in a Major Market by us or our licensee of
      the second phase II human clinical trial for a Product (other than the
      Product for which a distribution is made under the immediately preceding
      bullet point above).•
              
              23,312
      shares of our restricted, unregistered common stock within fifteen (15)
      days after we or our licensee applies for approval to market and sell a
      Product in a Major Market for the indications for which approval is
      sought, or Marketing Approval.•
              
              11,656
      shares of our restricted, unregistered common stock within fifteen (15)
      days after we or our licensee applies for Marketing Approval in a Major
      Market (other than the Major Market for which a distribution is made under
      the immediately preceding bullet point above).•
              
              46,625
      shares of our restricted, unregistered common stock within fifteen (15)
      days after we or our licensee obtains the first Marketing Approval for a
      Product from the applicable regulatory agency in a Major
      Market.•
              
              23,312
      shares of our restricted, unregistered common stock within fifteen (15)
      days after we or our licensee obtains Marketing Approval for a Product
      from the applicable regulatory agency in a Major Market (other than the
      Major Market for which a distribution is made under the immediately
      preceding bullet point above).
 
 
 
 
 -41-
 
  
  As discussed above, in aggregate,
Raptor Pharmaceuticals Corp. issued to Mr. Daley, 200,000 shares of its common
stock valued at $83,000 and paid $30,000 in cash bonuses related to
ConviviaTMmilestones along with another $20,000 in cash bonuses related to
employment milestones pursuant to Mr. Daley’s employment
agreement.  Due to the 2009 Merger, such 200,000 shares Raptor
Pharmaceuticals Corp. described above became 46,625 shares of our common
stock.
 
 
 Contractual
Obligations with Former Encode Securityholders
 
 Pursuant to the terms of the merger
agreement, or Encode Merger Agreement, that we entered into with Encode
Pharmaceuticals, Inc. and Nicholas Stergis in December 2007, former Encode
securityholders will be entitled to receive the following, if at all, in such
amounts and only to the extent certain future milestones are accomplished by us,
as set forth below:
 
 •
              
              Restricted,
      unregistered common stock, stock options to purchase our common stock, and
      warrants to purchase our common stock in an amount equal to, in the
      aggregate, 116,562 shares of our common stock upon the receipt by it at
      any time prior to the fifth-year anniversary of the Encode Merger
      Agreement of approval to market and sell a product for the treatment of
      cystinosis predominantly based upon and derived from the assets acquired
      from Encode, or Cystinosis Product, from the applicable regulatory agency
      (e.g., FDA and European Agency for the Evaluation of European Medical
      Products or EMEA) in a given major market in the world.•
              
              Restricted,
      unregistered common stock, stock options to purchase our common stock, and
      warrants to purchase our common stock in an amount equal to 442,934 shares
      of our common stock upon the receipt by us at any time prior to the fifth
      anniversary of the Encode Merger Agreement of approval to market and sell
      a product, other than a Cystinosis Product, predominantly based upon and
      derived from the assets acquired from Encode, from the applicable
      regulatory agency (e.g., FDA and EMEA) in a given major market in the
      world.
 
 If within five years from the date of
the Encode Merger Agreement, there occurs a transaction or series of related
transactions that results in the sale of all or substantially all of the assets
acquired from Encode other than to our affiliate in such case where such assets
are valued at no less than $2.5 million, the former Encode stockholders will be
entitled to receive, in the aggregate, restricted, unregistered common stock,
stock options to purchase our common stock, and warrants to purchase our common
stock in an amount equal to 559,496 shares of common stock, less the aggregate
of all milestone payments previously made or owing, if any.
 
 Pursuant to the terms of the Encode
Merger Agreement, an Encode stockholder was granted the right to demand the
registration of its portion of the initial restricted, unregistered common stock
issued to it in connection with the execution of the Encode Merger Agreement at
any time following 140 days from the closing date of the merger with Encode and
prior to the expiration of the fourth anniversary of the Encode Merger
Agreement.  To the extent that future milestones as described above
are accomplished by us within five years from the effective time of the merger
with Encode, we will be obligated to file a registration statement within 90
days covering such Encode stockholder’s portion of such respective future
restricted, unregistered common stock issued relating to such milestone
payment.
 
 Contractual
Obligations with UCSD
 
 As a result of the merger of our
clinical subsidiary and Encode, we received the exclusive worldwide license to
DR Cysteamine, or License Agreement for use in the field of human therapeutics
for metabolic and neurologic disorders, developed by clinical scientists at the
UCSD, School of Medicine. DR Cysteamine is a proprietary, delayed-release,
enteric-coated microbead formulation of cysteamine bitartrate, a cystine
depleting agent currently approved by the FDA. Cysteamine bitartrate is
prescribed for the management of the genetic disorder known as 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 HD and NASH.
 
 In consideration of the grant of the
license, prior to the merger, Encode paid an initial license fee and we will be
obligated to pay an annual maintenance fee of $15,000 until we begin commercial
sales of any products developed pursuant to the License Agreement. In addition
to the maintenance fee, we 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 we begin commercially selling any products pursuant to the License
Agreement, if ever. Under the License Agreement, we are 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. In addition, we are obligated to, among other things, annually spend
at least $200,000
 
 
 
 
 -42-
  
  
 for the
development of products—which, as of August 31, 2009, we had spent approximately
$4.1 million on such programs—pursuant to the License Agreement. To date, we
have paid $270,000 in milestone payments to UCSD based upon the initiation of
clinical trials in cystinosis and in NASH. To the extent that we fail to perform
any of our obligations under the License Agreement, UCSD may terminate the
license or otherwise cause the license to become non-exclusive.
 
 Contractual
Obligations To Tptx, Inc. Employees
 
 Pursuant to the documents related to
the 2009 Merger, including amended employment agreements with the TPTX, Inc.
employees, who were our former executives of prior to the 2009 Merger, we are
obligated to pay such former executives their salaries, benefits and other
obligations through February 28, 2010.  The remaining aggregate of the
obligations as of November 30, 2009 are approximately $429,000.
 
 Off-Balance
Sheet Arrangements
 
 We do not have any outstanding
derivative financial instruments, off-balance sheet guarantees, interest rate
swap transactions or foreign currency contracts. We do not engage in trading
activities involving non-exchange traded contracts.
 
 Reverse
Acquisition
 
 We have treated the 2009 Merger as a
reverse acquisition and the reverse acquisition will be accounted for as a
recapitalization.
 
 For accounting purposes, Raptor
Pharmaceuticals Corp. is considered the accounting acquirer in the reverse
acquisition. The historical financial statements reported in the Quarterly
Report on Form 10-Q and in future periods are and will be those of Raptor
Pharmaceuticals Corp. consolidated with its subsidiaries and with us, its
parent, Raptor Pharmaceutical Corp. (formerly TorreyPines Therapeutics, Inc.).
Earnings per share for periods prior to the reverse merger have been restated to
reflect the number of equivalent shares received by former
stockholders.
 
 Going
Concern
 
 Due to the uncertainty of our ability
to meet our current operating and capital expenses, in their reports on our
audited financial statements for the years ended August 31, 2009, 2008, 2007 and
for the period September 8, 2005 (inception) to August 31, 2006, our independent
registered public accounting firm, Burr, Pilger & Mayer, LLP, included an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern. Our financial statements contain additional note disclosures
describing the circumstances that led to this disclosure by our independent
registered public accounting firm.
 
 New
Accounting Pronouncements
 
 In September 2006, ASC Topic 820, Fair Value Measurements (“ASC
820”) (previously listed as the FASB issued SFAS No. 157, Fair Value
Measurements). ASC 820 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. ASC 820 does not require any
new fair value measurements; rather, it applies under other accounting
pronouncements that require or permit fair value measurements. The provisions of
ASC 820 are to be applied prospectively as of the beginning of the fiscal year
in which it is initially applied, with any transition adjustment recognized as a
cumulative-effect adjustment to the opening balance of retained earnings. The
provisions of ASC 820 are effective for fiscal years beginning after November
15, 2007; therefore, we adopted ASC 820 as of September 1, 2008 for financial
assets and liabilities. In accordance with FASB Staff Position 157-2, Effective
Date of ASC 820, we adopted  the provisions of ASC 820 for our
non-financial assets and non-financial liabilities on September 1, 2009 and have
determined that it had no material impact on the our results for the three
months ended November 30, 2009.. See Note 5, Fair Value Measurements, in our
condensed consolidated financial statement footnotes, regarding the disclosure
of the value of our cash equivalents.
 
 In February 2007, the FASB issued ASC
Topic 825, Financial
Instruments, (“ASC 825”) (previously SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement No.
115),which
permits the measurement of many financial instruments and certain other asset
and liabilities at fair value on an instrument-by-instrument basis (the fair
value option). The guidance is applicable for fiscal years beginning after
November 15, 2007; therefore, we adopted ASC 825 as of September 1, 2008. We
have determined that ASC 825 had no material impact on our financial results for
the three months ended November 30, 2009.
 q
 -43-
  
  In June 2007, the EITF reached a
consensus on ASC Topic 730, Research and Development,
(“ASC 730”) (previously EITF No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities). ASC 730 specifies the timing of expense recognition for
non-refundable advance payments for goods or services that will be used or
rendered for research and development activities. ASC 730 was effective for
fiscal years beginning after December 15, 2007, and early adoption is not
permitted; therefore, we adopted ASC 730 as of September 1, 2008. We have
determined that ASC 730 had no material impact on our financial results for the
three months ended November 30, 2009.
 
 In December 2007, the EITF reached a
consensus on ASC Topic 808, Collaborative Agreement,
(“ASC 808”) (previously EITF 07-01, Accounting for Collaborative
Arrangements).  ASC 808 discusses the appropriate income
statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and
commercialization of intellectual property. The sufficiency of disclosure
related to these arrangements is also specified. ASC 808 is effective for fiscal
years beginning after December 15, 2008. As a result, ASC 808 is effective for
us as of September 1, 2009.  Based upon the nature of our business,
ASC 808 could have a material impact on our financial position and consolidated
results of operations in future years, but had no material impact for the three
months ended November 30, 2009.
 
 In December 2007, the FASB issued ASC
Topic 805, Business
Combinations, (“ASC 805”) (previously SFAS 141(R) and FASB ASC Topic 810,
Consolidation (“ASC
810”) (previously SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51). 
These statements will significantly change the financial accounting and
reporting of business combination transactions and non-controlling (or minority)
interests in consolidated financial statements. ASC 805 requires companies to:
(i) recognize, with certain exceptions, 100% of the fair values of assets
acquired, liabilities assumed, and non-controlling interests in acquisitions of
less than a 100% controlling interest when the acquisition constitutes a change
in control of the acquired entity; (ii) measure acquirer shares issued in
consideration for a business combination at fair value on the acquisition date;
(iii) recognize contingent consideration arrangements at their acquisition-date
fair values, with subsequent changes in fair value generally reflected in
earnings; (iv) with certain exceptions, recognize pre-acquisition loss and gain
contingencies at their acquisition-date fair values; (v) capitalize in-process
research and development (“IPR&D”) assets acquired; (vi) expense, as
incurred, acquisition-related transaction costs; (vii) capitalize
acquisition-related restructuring costs only if the criteria in ASC 420, Exit and Disposal Cost
Obligations, (previously SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities), are met as of the acquisition date; and
(viii) recognize changes that result from a business combination transaction in
an acquirer’s existing income tax valuation allowances and tax uncertainty
accruals as adjustments to income tax expense. ASC 805 is required to be adopted
concurrently with ASC 810 and is effective for business combination transactions
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008 (our fiscal 2010).
Early adoption of these statements is prohibited. We believe the adoption of
these statements will have a material impact on significant acquisitions
completed after September 1, 2009.   See Note 9  to our
condensed consolidated financial statements, which reflects the accounting
treatment of our 2009 Merger utilizing these provisions.
 
 In March 2008, the FASB issued ASC
Topic 815, Derivatives and
Hedging, (“ASC 815”) (previously SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities). This statement will require enhanced
disclosures about derivative instruments and hedging activities to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. We adopted ASC 815 on December 1, 2008 and
have determined that ASC 815 had no material impact on our financial results for
the three months ended November 30, 2009.
 
 In May 2008, the FASB released ASC
Topic 470, Debt, (“ASC
470”) (previously FASB Staff Position (“FSP”) APB 14-1 Accounting For Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) that alters the accounting treatment for convertible debt
instruments that allow for either mandatory or optional cash settlements. ASC
470 specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. Furthermore, it would require recognizing interest expense
in prior periods pursuant to retrospective accounting treatment. FSP ASC 470 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008; therefore, we adopted ASC 470 as of September 1, 2009. We
have determined that ASC 470 had no material impact on our condensed
consolidated financial statements for the three months ended November 30,
2009.
 
 In June 2008, the FASB issued FASB ASC
Topic 815, Derivatives and
Hedging, (“ASC 815”) (previously EITF 07-5, Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own
Stock).  ASC 815 requires entities to evaluate whether an
equity-linked financial instrument (or embedded feature) is
 
 -44-
  
  
 indexed
to its own stock by assessing the instrument’s contingent exercise provisions
and settlement provisions. Instruments not indexed to their own stock fail to
meet the scope exception of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, paragraph 11(a), and should be
classified as a liability and marked-to-market. The statement is effective for
fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years and is to be applied to outstanding instruments upon adoption with
the cumulative effect of the change in accounting principle recognized as an
adjustment to the opening balance of retained earnings. We adopted ASC 815 as of
September 1, 2009 and have determined that ASC 815 had no material impact on our
condensed consolidated financial statements for the three months ended November
30, 2009.
 
 In April 2008, the FASB issued ASC
Topic 350, Intangibles –
Goodwill and Other, (“ASC 350”) (previously FSP SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets). ASC 350 provides guidance with respect to estimating
the useful lives of recognized intangible assets acquired on or after the
effective date and requires additional disclosure related to the renewal or
extension of the terms of recognized intangible assets. ASC 350 is effective for
fiscal years and interim periods beginning after December 15, 2008. We adopted
ASC 350 as of September 1, 2009 and have determined that ASC 350 had no material
impact on our condensed consolidated financial statements for the three months
ended November 30, 2009.
 
 In May 2009, the FASB issued ASC Topic
855, Subsequent Events,
(“ASC 855”) (previously SFAS No. 165, Subsequent Events). ASC 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. ASC 855 defines the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, and the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements. ASC 855 is effective for fiscal years and interim periods
ending after June 15, 2009. We adopted ASC 855 as of August 31, 2009 and
anticipate that the adoption will impact the accounting and disclosure of future
transactions. Our management has evaluated and disclosed subsequent events from
the balance sheet date of November 30, 2009 through January 13, 2010, the day
before the date that these condensed consolidated financial statements were
included in our Quarterly Report on Form 10-Q and filed with the
SEC.
 
 ASC Topic 825, Financial Instruments, (“ASC
825”) (previously FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107,
Disclosures about Fair Value
of Financial Instruments), to require disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This ASC 825 also amends APB Opinion
No. 28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. The adoption of ASC 825 did
not have a material impact on our condensed consolidated financial statements
for the three months ended November 30, 2009.
  In June 2009, the FASB issued SFAS No.
167, Amendments to FASB
Interpretation No. 46(R), (“SFAS 167”), which has not yet been codified
in the ASC. The amendments include: (1) the elimination of the exemption for
qualifying special purpose entities, (2) a new approach for determining who
should consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. This
statement is effective for fiscal years beginning after November 15, 2009, and
for interim periods within that first annual reporting period. We are currently
evaluating the impact of this standard, however, we do not expect SFAS 167 will
have a material impact on our condensed consolidated financial
statements.
 
 In June 2009, the FASB issued ASC Topic
105, Generally Accepted
Accounting Standards, (“ASC 105”) (previously SFAS No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162),
(the “Codification”). The Codification, which was launched on July 1, 2009,
became the single source of authoritative nongovernmental U.S. GAAP, superseding
existing FASB, American Institute of Certified Public Accountants (“AICPA”),
EITF and related literature. The Codification eliminates the GAAP hierarchy
contained in ASC 105 and establishes one level of authoritative GAAP. All other
literature is considered non-authoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. We adopted ASC 105 as of September 1, 2009 however,
references to both current GAAP and the Codification are included in this
filing. We have determined that this provision had no material impact on our
condensed consolidated financial statements for the three months ended November
30, 2009.
 
 
 
 
 -45-
 
  
  
 Item
3: Quantitative And Qualitative Disclosures About Market Risk
 
 Interest
Rate Market Risk
 
 Our exposure to market risk for changes
in interest rates relates primarily to our investment portfolio. By policy, we
place our investments with highly rated credit issuers and limit the amount of
credit exposure to any one issuer. As stated in our policy, we seek to improve
the safety and likelihood of preservation of our invested funds by limiting
default risk and market risk.
 
 We mitigate default risk by investing
in high credit quality securities and by positioning our portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity.
 
 As of November 30, 2009, our investment
portfolio does not include any investments with significant exposure to the
subprime mortgage market issues. Based on our investment portfolio, which
consists 100% of money market accounts, and interest rates at November 30, 2009,
we believe that a 100 basis point decrease in interest rates could result in a
potential loss of future interest income of approximately $11,000 annually,
however it would have no effect on the fair value of the money market principal
balances.
 
 Of our total consolidated cash and cash
equivalent balance of approximately $1.2 million as of November 30, 2009, our
money market balances represent $1.0 million or 88%.
 
 Our debt obligations consist of our
capital lease to finance our photocopier, which carries a fixed imputed interest
rate and, as a result, we are not exposed to interest rate market risk on our
capital lease obligations. The carrying value of our capital lease obligation
approximates its fair value at November 30, 2009.
 
 Item 4.CONTROLS AND
PROCEDURES
 
 Conclusion
Regarding Effectiveness of Disclosure Controls and Procedures
 
 As of November 30, 2009, we performed
an evaluation of the effectiveness of our disclosure controls and procedures
that are designed to ensure that the information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on our evaluation,
our management, including our Chief Executive Officer and Chief Financial
Officer, has concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) as of November 30, 2009, are effective at such reasonable assurance
level.
 
 Changes in
Internal Control Over Financial Reporting
 
 During the most recent fiscal quarter,
other than the addition of two bank accounts controlled by the former
TorreyPines employees, which continue to be controlled by the former TorreyPines
employees, who are now our employees, there have not been any significant
changes in our internal control over financial reporting or in other factors
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
 
 
 
 
 
 
 
 
 
 
 
 
 -46-
  
  
 
 
 PART
II - OTHER INFORMATION
 Item1.             Legal
Proceedings.
 
 Several lawsuits were filed against us
(as TorreyPines) in February 2005 in the U.S. District Court for the Southern
District of New York asserting claims under Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder on behalf of a class of purchasers of our
common stock during the period from June 26, 2003, through and including
February 4, 2005, referred to as the class period. Dr. Marvin S. Hausman, M.D.,
a former director and a former Chief Executive Officer, and Dr. Gosse B.
Bruinsma, M.D., also a former director and a former Chief Executive Officer,
were also named as defendants in the lawsuits. These actions were consolidated
into a single class action lawsuit in January 2006. On April 10, 2006, the class
action plaintiffs filed an amended consolidated complaint. We filed our answer
to that complaint on May 26, 2006. Our motion to dismiss the consolidated
amended complaint was filed on May 26, 2006 and was submitted to the court for a
decision in September 2006. On March 31, 2009 the U.S. District Court for the
Southern District of New York dismissed the proceedings. On April 24, 2009, an
appeal was filed with the United States Court of Appeals for the Second Circuit
by the class action plaintiffs. Our response to such appeal was filed on October
23, 2009. We do not anticipate that this claim, if successful, would burden the
Company with any additional liability above and beyond the insurance coverage
provided under the insurance policy that we currently maintain.
 
 Other than as described above, we know
of no material, active or pending legal proceedings against us, nor are we
involved as a plaintiff in any material proceedings or pending litigation. There
are no proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial stockholders are an adverse party or have a material
interest adverse to us.
 
 
  Item
1A. Risk Factors.
  RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS
   An
investment in our securities involves a high degree of risk. Before you decide
to invest in our securities, you should consider carefully all of the
information in this Quarterly Report on Form 10-Q, including the risks and
uncertainties described below, as well as other information included in or
incorporated by reference into this Quarterly Report on Form 10-Q, particularly
the specific risk factors discussed in the sections titled “Risk Factors”
contained in our filings with the SEC pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, before deciding
whether to invest in our securities. Any of these risks could have a material
adverse effect on our business, prospects, financial condition and results of
operations. In any such case, the trading price of our common stock could
decline and you could lose all or part of your investment. You should also refer
to the other information contained in this Quarterly Report on Form 10-Q, or
incorporated herein by reference, including our financial statements and the
notes to those statements, and the information set forth under the caption
“Forward-Looking Statements.”  The risks described below and contained in
our other periodic reports are not the only ones that we face.  Additional
risks not presently known to us or that we currently deem immaterial may also
adversely affect our business operations.
  
 Risks Related to Our
Business
  If we fail to
obtain the capital necessary to fund our operations, our financial results,
financial condition and our ability to continue as a going concern will be
adversely affected and we will have to delay or terminate some or all of our
product development programs.
 
 Our condensed consolidated financial
statements as of November 30, 2009 have been prepared assuming that we will
continue as a going concern. As of November 30, 2009, we had an accumulated
deficit of approximately $24.8 million. We expect to continue to incur losses
for the foreseeable future and will have to raise substantial cash to fund our
planned operations.  Our recurring losses from operations and our
stockholders’ deficit raise substantial doubt about our ability to continue as a
going concern and, as a result, our independent registered public accounting
firm included an explanatory paragraph in its report on our consolidated
financial statements for the year ended August 31, 2009, with respect to this
uncertainty. We will need to generate significant revenue or raise additional
capital to continue to operate as a going concern. In addition, the perception
that we may not be able
 
 -47-
  
  to
continue as a going concern may cause others to choose not to deal with us due
to concerns about our ability to meet our contractual obligations and may
adversely affect our ability to raise additional capital.
 
 We believe that our cash and cash
equivalents at November 30, 2009 along with the net funds raised subsequent to
quarter-end in December 2009 of approximately $6.9 million (see the subsequent
event Note 12) will be sufficient to meet our obligations into the third
calendar quarter of 2010. This estimate is based on assumptions that may prove
to be wrong. We are currently in the process of negotiating strategic
partnerships and collaborations in order to fund our preclinical and clinical
programs into 2011. If we are not able to close a strategic transaction, we
anticipate raising additional capital in the second calendar quarter of 2010 for
the continued development of our drug development programs..  We will
need to sell equity or debt securities to raise significant additional funds.
The sale of additional securities is likely to result in additional dilution to
our stockholders. Additional financing may not be available in amounts or on
terms satisfactory to us or at all. We may be unable to raise additional
financing due to a variety of factors, including our financial condition, the
status of our research and development programs, and the general condition of
the financial markets. If we fail to raise significant additional financing, we
will have to delay or terminate some or all of our research and development
programs, our financial condition and operating results will be adversely
affected and we may have to cease our operations.
 
 If we obtain significant additional
financing, we expect to continue to spend substantial amounts of capital on our
operations for the foreseeable future. The amount of additional capital we will
need depends on many factors, including:
 
 •
              
              the
      progress, timing and scope of our preclinical studies and clinical
      trials;•
              
              the
      time and cost necessary to obtain regulatory approvals;•
              
              the
      time and cost necessary to develop commercial manufacturing processes,
      including quality systems, and to build or acquire manufacturing
      capabilities;•
              
              the
      time and cost necessary to respond to technological and market
      developments; and•
              
              any
      changes made or new developments in our existing collaborative, licensing
      and other corporate relationships or any new collaborative, licensing and
      other commercial relationships that we may
  establish.
 
 Moreover, our fixed expenses such as
rent, collaboration and license payments and other contractual commitments are
substantial and will likely increase in the future. These fixed expenses are
likely to increase because we expect to enter into:
 
 •
              
              additional
      licenses and collaborative agreements;•
              
              contracts
      for manufacturing, clinical and preclinical research, consulting,
      maintenance and administrative services; and•
              
              financing
      facilities.
 
 We are an early development stage
company and have not generated any revenues to date and have a limited operating
history. Many of our drug product candidates are in the concept stage and have
not undergone significant testing in preclinical studies or any testing in
clinical trials. Moreover, we cannot be certain that our research and
development efforts will be successful or, if successful, that our drug product
candidates will ever be approved for sale or generate commercial revenues. We
have a limited relevant operating history upon which an evaluation of our
performance and prospects can be made. We are subject to all of the business
risks associated with a new enterprise, including, but not limited to, risks of
unforeseen capital requirements, failure of drug product candidates either in
preclinical testing or in clinical trials, failure to establish business
relationships, and competitive disadvantages against larger and more established
companies.
 
 The current
disruptions in the financial markets could affect our ability to obtain
financing on favorable terms (or at all).
 
 The U.S. credit markets have recently
experienced historic dislocations and liquidity disruptions which have caused
financing to be unavailable in many cases and, even if available, have caused
the cost of prospective financings to increase. These circumstances have
materially impacted liquidity in the debt markets, making financing terms for
borrowers able to find financing less attractive, and in many cases have
resulted in the
 
 -48-
  
  unavailability
of certain types of debt financing. Continued uncertainty in the debt and equity
markets may negatively impact our ability to access financing on favorable terms
or at all. In addition, Federal legislation to deal with the current disruptions
in the financial markets could have an adverse affect on our ability to raise
other types of financing.
 
 Even if we are
able to develop our drug product candidates, we may not be able to receive
regulatory approval, or if approved, we may not be able to generate significant
revenues or successfully commercialize our products, which would adversely
affect our financial results and financial condition and we would have to delay
or terminate some or all of our research product development
programs.
 
 All of our drug product candidates are
at an early stage of development and will require extensive additional research
and development, including preclinical testing and clinical trials, as well as
regulatory approvals, before we can market them.  Since our inception
in 1997, and since Raptor Pharmaceuticals Corp. began operations in 2005, both
companies have dedicated substantially all of their resources to the research
and development of their technologies and related compounds. All of our
compounds currently are in preclinical or clinical development, and none have
been submitted for marketing approval. Our preclinical compounds may not enter
human clinical trials on a timely basis, if at all, and we may not develop any
product candidates suitable for commercialization.   We cannot
predict if or when any of the drug product candidates we intend to develop will
be approved for marketing. There are many reasons that we may fail in our
efforts to develop our drug product candidates. These include:
 
 •
              
              the
      possibility that preclinical testing or clinical trials may show that our
      drug product candidates are ineffective and/or cause harmful side
      effects;•
              
              our
      drug product candidates may prove to be too expensive to manufacture or
      administer to patients;•
              
              our
      drug product candidates may fail to receive necessary regulatory approvals
      from the FDA or foreign regulatory authorities in a timely manner, or at
      all;•
              
              our
      drug product candidates, if approved, may not be produced in commercial
      quantities or at reasonable costs;•
              
              our
      drug product candidates, if approved, may not achieve commercial
      acceptance;•
              
              regulatory
      or governmental authorities may apply restrictions to our drug product
      candidates, which could adversely affect their commercial success;
      and•
              
              the
      proprietary rights of other parties may prevent us or our potential
      collaborative partners from marketing our drug product
      candidates.
 
 If we fail to develop our drug product
candidates, our financial results and financial condition will be adversely
affected, we will have to delay or terminate some or all of our research product
development programs and may be forced to cease operations.
  If we are limited
in our ability to utilize acquired or licensed technologies, we may be unable to
develop, out-license, market and sell our product candidates, which could cause
delayed new product introductions, and/or adversely affect our reputation, any
of which could have a material adverse effect on our business, prospects,
financial condition, and operating results.
 
 We have acquired and licensed certain
proprietary technologies, discussed in the following risk factors, and plan to
further license and acquire various patents and proprietary technologies owned
by third parties. These agreements are critical to our product development
programs. These agreements may be terminated, and all rights to the technologies
and product candidates will be lost, if we fail to perform our obligations under
these agreements and licenses in accordance with their terms including, but not
limited to, our ability to make all payments due under such agreements. Our
inability to continue to maintain these technologies could materially adversely
affect our business, prospects, financial condition, and operating results. In
addition, our business strategy depends on the successful development of these
licensed and acquired technologies into commercial products, and, therefore, any
limitations on our ability to utilize these technologies may impair our ability
to develop, out-license, market and sell our product candidates, delay new
product introductions, and/or adversely affect our reputation, any of which
could have a material adverse effect on our business, prospects, financial
condition, and operating results.
 
  
   -49-
   
  
  If the purchase
or licensing agreements we entered into are terminated, we will lose the right
to use or exploit our owned and licensed technologies, in which case we will
have to delay or terminate some or all of our research and development programs,
our financial condition and operating results will be adversely affected and we
may have to cease our operations.
  We entered into an asset purchase
agreement with BioMarin Pharmaceutical Inc., or BioMarin, for the purchase of
intellectual property related to the receptor-associated protein, or RAP,
technology, a licensing agreement with Washington University for mesoderm
development protein, or Mesd, and a licensing agreement with UCSD for DR
Cysteamine. BioMarin, Washington University and UCSD may terminate their
respective agreements with us upon the occurrence of certain events, including
if we enter into certain bankruptcy proceedings or if we materially breach our
payment obligations and fail to remedy the breach within the permitted cure
periods. Although we are not currently involved in any bankruptcy proceedings or
in breach of these agreements, there is a risk that we may be in the future,
giving BioMarin, Washington University and UCSD the right to terminate their
respective agreements with us. We have the right to terminate these agreements
at any time by giving prior written notice. If the BioMarin, Washington
University or UCSD agreements are terminated by either party, we would be forced
to assign back to BioMarin, in the case of the BioMarin agreement, all of our
rights, title and interest in and to the intellectual property related to the
RAP technology, would lose our rights to the Mesd technology, in the case of the
Washington University agreement and would lose our rights to DR Cysteamine, in
the case of UCSD. Under such circumstances, we would have no further right to
use or exploit the patents, copyrights or trademarks in those respective
technologies. If this happens, we will have to delay or terminate some or all of
our research and development programs, our financial condition and operating
results will be adversely affected, and we may have to cease our operations. If
we lose our rights to the intellectual property related to the RAP technology
purchased by us from BioMarin, our agreement with Roche regarding the evaluation
of therapeutic delivery across the blood-brain barrier utilizing NeuroTransTM
would likely be terminated and any milestone or royalty payments from Roche to
us would thereafter cease to accrue.
  If we fail to
compete successfully with respect to acquisitions, joint venture and other
collaboration opportunities, we may be limited in our ability to develop our
drug product candidates.
 
 Our competitors compete with us to
attract established biotechnology and pharmaceutical companies or organizations
for acquisitions, joint ventures, licensing arrangements or other
collaborations. Collaborations include licensing proprietary technology from,
and other relationships with, academic research institutions. If our competitors
successfully enter into partnering arrangements or license agreements with
academic research institutions, we will then be precluded from pursuing those
specific opportunities. Since each of these opportunities is unique, we may not
be able to find a substitute. Other companies have already begun many drug
development programs, which may target diseases that we are also targeting, and
have already entered into partnering and licensing arrangements with academic
research institutions, reducing the pool of available
opportunities.
 
 Universities and public and private
research institutions also compete with us. While these organizations primarily
have educational or basic research objectives, they may develop proprietary
technology and acquire patents that we may need for the development of our drug
product candidates. We will attempt to license this proprietary technology, if
available. These licenses may not be available to us on acceptable terms, if at
all. If we are unable to compete successfully with respect to acquisitions,
joint venture and other collaboration opportunities, we may be limited in our
ability to develop new products.
  If we do not
achieve our projected development goals in the time frames we announce and
expect, the credibility of our management and our technology may be adversely
affected and, as a result, the price of our common stock may
decline.
  
 For planning purposes, we estimate the
timing of the accomplishment of various scientific, clinical, regulatory and
other product development goals, which we sometimes refer to as milestones.
These milestones may include the commencement or completion of scientific
studies and clinical trials and the submission of regulatory
filings.
 
 From time to time, we may publicly
announce the expected timing of some of these milestones. All of these
milestones will be based on a variety of assumptions. The actual timing of these
milestones can vary dramatically compared to our estimates, in many cases for
reasons beyond our control. If we do not meet these milestones as publicly
announced, our stockholders may lose confidence in our ability to meet these
milestones and, as a result, the price of our common stock may
decline.
 
 -50-
 
  
  Our product
development programs will require substantial additional future funding which
could impact our operational and financial condition.
 
 It will take several years before we
are able to develop marketable drug product candidates, if at all. Our product
development programs will require substantial additional capital to successfully
complete them, arising from costs to:
 
 •
              
              conduct
      research, preclinical testing and human studies;•
              
              establish
      pilot scale and commercial scale manufacturing processes and facilities;
      and•
              
              establish
      and develop quality control, regulatory, marketing, sales, finance and
      administrative capabilities to support these
  programs.
 
 Our future operating and capital needs
will depend on many factors, including:
 
 •
              
              the
      pace of scientific progress in our research and development programs and
      the magnitude of these programs;•
              
              the
      scope and results of preclinical testing and human clinical
      trials;•
              
              our
      ability to obtain, and the time and costs involved in obtaining regulatory
      approvals;•
              
              our
      ability to prosecute, maintain, and enforce, and the time and costs
      involved in preparing, filing, prosecuting, maintaining and enforcing
      patent claims;•
              
              competing
      technological and market developments;•
              
              our
      ability to establish additional collaborations;•
              
              changes
      in our existing collaborations;•
              
              the
      cost of manufacturing scale-up; and•
              
              the
      effectiveness of our commercialization
  activities.
 
 We base our outlook regarding the need
for funds on many uncertain variables. Such uncertainties include the success of
our research initiatives, regulatory approvals, the timing of events outside our
direct control such as negotiations with potential strategic partners and other
factors. Any of these uncertain events can significantly change our cash
requirements as they determine such one-time events as the receipt or payment of
major milestones and other payments.
 
 Significant additional funds will be
required to support our operations and if we are unable to obtain them on
favorable terms, we may be required to cease or reduce further development or
commercialization of our drug product programs, to sell some or all of our
technology or assets, to merge with another entity or cease
operations.
  Uncertainties
regarding healthcare reform and third-party reimbursement may impair our ability
to raise capital, form collaborations and if any of our product candidates
become marketable, sell such products.
 
 The continuing efforts of governmental
and third-party payers to contain or reduce the costs of healthcare through
various means may harm our business. For example, in some foreign markets, the
pricing or profitability of healthcare products is subject to government
control. In the United States, there have been, and we expect there will
continue to be, a number of federal and state proposals to implement similar
government control. The implementation or even the announcement of any of these
legislative or regulatory proposals or reforms could harm our business if any of
our product candidates become marketable by reducing the prices we or our
partners are able to charge for our products (if marketable), impeding our
ability to achieve profitability, raise capital or form
collaborations.  In addition, the availability of reimbursement from
third-party payers determines, in large part, the demand for healthcare products
in the United States and elsewhere. Examples of such third-party payers are
government and private insurance plans. Significant uncertainty exists as to the
reimbursement status of newly approved healthcare products and third-party
payers are increasingly challenging the prices charged for medical products and
services. If we succeed in bringing one or more products to the market,
reimbursement from third-party payers may not be available or may not be
sufficient to allow us to sell such products on a competitive or profitable
basis.
  -51-
   If we fail to
demonstrate efficacy in our preclinical studies and clinical trials our future
business prospects, financial condition and operating results will be materially
adversely affected.
  The success of our development and
commercialization efforts will be greatly dependent upon our ability to
demonstrate drug product candidate efficacy in preclinical studies, as well as
in clinical trials. Preclinical studies involve testing drug product candidates
in appropriate non-human disease models to demonstrate efficacy and safety.
Regulatory agencies evaluate these data carefully before they will approve
clinical testing in humans. If certain preclinical data reveals potential safety
issues or the results are inconsistent with an expectation of the drug product
candidate’s efficacy in humans, the regulatory agencies may require additional
more rigorous testing, before allowing human clinical trials. This additional
testing will increase program expenses and extend timelines. We may decide to
suspend further testing on our drug product candidates or technologies if, in
the judgment of our management and advisors, the preclinical test results do not
support further development.
 
 Moreover, success in preclinical
testing and early clinical trials does not ensure that later clinical trials
will be successful, and we cannot be sure that the results of later clinical
trials will replicate the results of prior clinical trials and preclinical
testing. The clinical trial process may fail to demonstrate that our drug
product candidates are safe for humans and effective for indicated uses. This
failure would cause us to abandon a drug product candidate and may delay
development of other drug product candidates. Any delay in, or termination of,
our preclinical testing or clinical trials will delay the filing of our
investigational new drug application, or IND, and new drug application, or NDA,
as applicable, with the FDA and, ultimately, our ability to commercialize our
drug product candidates and generate product revenues. In addition, some of our
clinical trials will involve small patient populations. Because of the small
sample size, the results of these early clinical trials may not be indicative of
future results. Following successful preclinical testing, drug product
candidates will need to be tested in a clinical development program to provide
data on safety and efficacy prior to becoming eligible for product approval and
licensure by regulatory agencies. From first clinical trial through product
approval can take at least eight years, on average in the U.S.
 
 If any of our future clinical
development drug product candidates become the subject of problems, including
those related to, among others:
 
 •
              
              efficacy
      or safety concerns with the drug product candidates, even if not
      justified;•
              
              unexpected
      side-effects;•
              
              regulatory
      proceedings subjecting the drug product candidates to potential
      recall;•
              
              publicity
      affecting doctor prescription or patient use of the drug product
      candidates;•
              
              pressure
      from competitive products; or•
              
              introduction
      of more effective treatments,
 
 our
ability to sustain our development programs will become critically compromised.
For example, efficacy or safety concerns may arise, whether or not justified,
that could lead to the suspension or termination of our clinical
programs.
 
 Each clinical phase is designed to test
attributes of drug product candidates and problems that might result in the
termination of the entire clinical plan can be revealed at any time throughout
the overall clinical program. The failure to demonstrate efficacy in our
clinical trials would have a material adverse effect on our future business
prospects, financial condition and operating results.
 
 If we do not
obtain the support of new, and maintain the support of existing, key scientific
collaborators, it may be difficult to establish products using our technologies
as a standard of care for various indications, which may limit our revenue
growth and profitability and could have a material adverse effect on our
business, prospects, financial condition and operating
results.
 
 We will need to establish relationships
with additional leading scientists and research institutions. We believe that
such relationships are pivotal to establishing products using our technologies
as a standard of care for various indications. Although we have established a
Medical and Scientific Advisory Board and research collaborations, there is no
assurance that our Advisory Board members and our research collaborators will
continue to work with us or that we will be able to attract additional research
partners. If we are not able to maintain existing or establish new scientific
relationships to assist in our research and development, we may not be able to
successfully develop our drug product candidates.
  -52-
   If the
manufacturers upon whom we rely fail to produce in the volumes and quality that
we require on a timely basis, or to comply with stringent regulations applicable
to pharmaceutical manufacturers, we may face delays in the development and
commercialization of, or be unable to meet demand for, our products, if any, and
may lose potential revenues.
 
 We do not currently manufacture our
drug product candidates and do not currently plan to develop the capacity to do
so. The manufacture of pharmaceutical products requires significant expertise
and capital investment, including the development of advanced manufacturing
techniques and process controls. Manufacturers of pharmaceutical products often
encounter difficulties in production, particularly in scaling up initial
production. These problems include difficulties with production costs and
yields, quality control, including stability of the product candidate and
quality assurance testing, shortages of qualified personnel, as well as
compliance with strictly enforced federal, state and foreign regulations. Our
third-party manufacturers and key suppliers may experience manufacturing
difficulties due to resource constraints or as a result of labor disputes,
unstable political environments at foreign facilities or financial difficulties.
If these manufacturers or key suppliers were to encounter any of these
difficulties, or otherwise fail to comply with their contractual obligations,
our ability to timely launch any potential product candidate, if approved, would
be jeopardized.
 
 In addition, all manufacturers and
suppliers of pharmaceutical products must comply with cGMP requirements enforced
by the FDA, through its facilities inspection program. The FDA is likely to
conduct inspections of our third party manufacturer and key supplier facilities
as part of their review of any of our NDAs. If our third party manufacturers and
key suppliers are not in compliance with cGMP requirements, it may result in a
delay of approval, particularly if these sites are supplying single source
ingredients required for the manufacture of any potential product. These cGMP
requirements include quality control, quality assurance and the maintenance of
records and documentation. Furthermore, regulatory qualifications of
manufacturing facilities are applied on the basis of the specific facility being
used to produce supplies. As a result, if a manufacturer for us shifts
production from one facility to another, the new facility must go through a
complete regulatory qualification and be approved by regulatory authorities
prior to being used for commercial supply. Our manufacturers may be unable to
comply with these cGMP requirements and with other FDA, state and foreign
regulatory requirements. A failure to comply with these requirements may result
in fines and civil penalties, suspension of production, suspension or delay in
product approval, product seizure or recall, or withdrawal of product approval.
If the safety of any quantities supplied is compromised due to a our third party
manufacturer’s or key supplier’s failure to adhere to applicable laws or for
other reasons, we may not be able to obtain regulatory approval for or
successfully commercialize our products.
  If we fail to
obtain or maintain orphan drug exclusivity for some of our drug product
candidates, our competitors may sell products to treat the same conditions and
our revenues will be reduced.
 
 As part of our business strategy, we
intend to develop some drugs that may be eligible for FDA and European Union, or
EU, orphan drug designation. Under the Orphan Drug Act, the FDA may designate a
product as an orphan drug if it is a drug intended to treat a rare disease or
condition, defined as a patient population of less than 200,000 in the U.S. The
company that first obtains FDA approval for a designated orphan drug for a given
rare disease receives marketing exclusivity for use of that drug for the stated
condition for a period of seven years. Orphan drug exclusive marketing rights
may be lost if the FDA later determines that the request for designation was
materially defective or if the manufacturer is unable to assure sufficient
quantity of the drug. Similar regulations are available in the EU with a 10-year
period of market exclusivity.
 
 Because the extent and scope of patent
protection for some of our drug products is particularly limited, orphan drug
designation is especially important for our products that are eligible for
orphan drug designation. For eligible drugs, we plan to rely on the exclusivity
period under Orphan Drug Act designation to maintain a competitive position. If
we do not obtain orphan drug exclusivity for our drug products that do not have
patent protection, our competitors may then sell the same drug to treat the same
condition and our revenues will be reduced.
 
 Even though we have obtained orphan
drug designation for DR Cysteamine for the potential treatment of nephropathic
cystinosis, the potential treatment of HD and the potential treatment of Batten
Disease and even if we obtain orphan drug designation for our future drug
product candidates, due to the uncertainties associated with developing
pharmaceutical products, we may not be the first to obtain marketing approval
for any orphan indication. Further, even if we obtain orphan drug exclusivity
for a product, that exclusivity may not effectively protect the product from
competition because different drugs can be approved for the same condition. Even
after an orphan drug is approved, the FDA can subsequently approve the same drug
for the same condition if the FDA concludes that the later drug is safer, more
effective or makes a major contribution to patient care. Orphan drug designation
neither shortens the development time or regulatory review time of a drug, nor
gives the drug any advantage in the regulatory review or approval
process.
  -53-
  
  The fast-track
designation for our drug product candidates, if obtained, may not actually lead
to a faster review process and a delay in the review process or in the approval
of our products will delay revenue from the sale of the products and will
increase the capital necessary to fund these product development
programs.
 
 Although we have received Orphan Drug
Designations from the FDA as described above, our drug product candidates may
not receive an FDA fast-track designation or priority review. Without fast-track
designation, submitting an NDA and getting through the regulatory process to
gain marketing approval is a lengthy process. Under fast-track designation, the
FDA may initiate review of sections of a fast-track drug’s NDA before the
application is complete. However, the FDA’s time period goal for reviewing an
application does not begin until the last section of the NDA is submitted.
Additionally, the fast-track designation may be withdrawn by the FDA if the FDA
believes that the designation is no longer supported by data emerging in the
clinical trial process. Under the FDA policies, a drug candidate is eligible for
priority review, or review within a six-month time frame from the time a
complete NDA is accepted for filing, if the drug candidate provides a
significant improvement compared to marketed drugs in the treatment, diagnosis
or prevention of a disease. A fast-track designated drug candidate would
ordinarily meet the FDA’s criteria for priority review. The fast-track
designation for our drug product candidates, if obtained, may not actually lead
to a faster review process and a delay in the review process or in the approval
of our products will delay revenue from the sale of the products and will
increase the capital necessary to fund these product development
programs.
  Because the
target patient populations for some of our products are small, we must achieve
significant market share and obtain high per-patient prices for our products to
achieve profitability.
 
 Our clinical development of DR
Cysteamine targets diseases with small patient populations, including
nephropathic cystinosis and HD. If we are successful in developing DR Cysteamine
and receive regulatory approval to market DR Cysteamine for a disease with a
small patient population, the per-patient prices at which we could sell DR
Cysteamine for these indications are likely to be relatively high in order for
us to recover our development costs and achieve profitability. We believe that
we will need to market DR Cysteamine for these indications worldwide to achieve
significant market penetration of this product.
  We may not be
able to market or generate sales of our products to the extent
anticipated.
 
 Assuming that we are successful in
developing our drug product candidates and receive regulatory clearances to
market our products, our ability to successfully penetrate the market and
generate sales of those products may be limited by a number of factors,
including the following:
 
 •
              
              Certain
      of our competitors in the field have already received regulatory approvals
      for and have begun marketing similar products in the U.S., the EU, Japan
      and other territories, which may result in greater physician awareness of
      their products as compared to ours.•
              
              Information
      from our competitors or the academic community indicating that current
      products or new products are more effective than our future products
      could, if and when it is generated, impede our market penetration or
      decrease our future market share.•
              
              Physicians
      may be reluctant to switch from existing treatment methods, including
      traditional therapy agents, to our future products.•
              
              The
      price for our future products, as well as pricing decisions by our
      competitors, may have an effect on our revenues.•
              
              Our
      future revenues may diminish if third-party payers, including private
      healthcare coverage insurers and healthcare maintenance organizations, do
      not provide adequate coverage or reimbursement for our future
      products.
  
  
   
   -54-
  
  
   There are many
difficult challenges associated with developing proteins that can be used to
transport therapeutics across the blood-brain barrier.
 
 Our RAP technology has a potential
clinical use as a drug transporter through the blood-brain barrier. However, we
do not know that our technology will work or work safely. Many groups and
companies have attempted to solve the critical medical challenge of developing
an efficient method of transporting therapeutic proteins from the blood stream
into the brain. Unfortunately, these efforts to date have met with little
success due in part to a lack of adequate understanding of the biology of the
blood-brain barrier and to the enormous scientific complexity of the transport
process itself.  In the research and development of our RAP
technology, we will certainly face many of the same issues that have caused
these earlier attempts to fail. It is possible that:
 
 •
              
              We
      or our collaborator/licensee will not be able to produce enough RAP drug
      product candidates for testing;•
              
              the
      pharmacokinetics, or where the drug distributes in the body, of our RAP
      drug product candidates will preclude sufficient binding to the targeted
      receptors on the blood-brain barrier;•
              
              the
      targeted receptors are not transported across the blood-brain
      barrier;•
              
              other
      features of the blood-brain barrier, apart from the cells, block access
      molecules to brain tissue after transport across the
  cells;•
              
              the
      targeted receptors are expressed on the blood-brain barrier at densities
      insufficient to allow adequate transport of our RAP drug product
      candidates into the brain;•
              
              targeting
      of the selected receptors induces harmful side-effects which prevent their
      use as drugs; or•
              
              that
      we or our collaborator/licensee’s RAP drug product candidates cause
      unacceptable side-effects.
 
 Any of these conditions may preclude
the use of RAP or RAP fusion compounds from potentially treating diseases
affecting the brain.
 
 If our
competitors succeed in developing products and technologies that are more
effective than our own, or if scientific developments change our understanding
of the potential scope and utility of our drug product candidates, then our
technologies and future drug product candidates may be rendered less
competitive.
 
 We face significant competition from
industry participants that are pursuing similar technologies that we are
pursuing and are developing pharmaceutical products that are competitive with
our drug product candidates. Nearly all of our industry competitors have greater
capital resources, larger overall research and development staffs and
facilities, and a longer history in drug discovery and development, obtaining
regulatory approval and pharmaceutical product manufacturing and marketing than
we do. With these additional resources, our competitors may be able to respond
to the rapid and significant technological changes in the biotechnology and
pharmaceutical industries faster than we can. Our future success will depend in
large part on our ability to maintain a competitive position with respect to
these technologies. Rapid technological development, as well as new scientific
developments, may result in our compounds, drug product candidates or processes
becoming obsolete before we can recover any of the expenses incurred to develop
them. For example, changes in our understanding of the appropriate population of
patients who should be treated with a targeted therapy like we are developing
may limit the drug’s market potential if it is subsequently demonstrated that
only certain subsets of patients should be treated with the targeted
therapy.
  Our reliance on
third parties, such as collaborators, university laboratories, contract
manufacturing organizations and contract or clinical research organizations, may
result in delays in completing, or a failure to complete, preclinical testing or
clinical trials if they fail to perform under our agreements with
them.
 
 In the course of product development,
we may engage university laboratories, other biotechnology or companies or
contract or clinical manufacturing organizations to manufacture drug material
for us to be used in preclinical and clinical testing and collaborators and
contract or clinical research organizations to conduct and manage preclinical
studies and clinical trials. If we engage these organizations to help us with
our preclinical and clinical programs, many important aspects of this process
have been and will be out of our direct control. If any of these organizations
we may engage in the future fail to perform their obligations under our
agreements with them or fail to perform preclinical testing and/or clinical
trials in a satisfactory manner, we may face delays in completing our clinical
trials, as well as commercialization of any of our drug product candidates.
Furthermore, any loss or
 -55-
  
  delay in
obtaining contracts with such entities may also delay the completion of our
clinical trials, regulatory filings and the potential market approval of our
drug product candidates.
  Companies and
universities that have licensed product candidates to us for research, clinical
development and marketing are sophisticated competitors that could develop
similar products to compete with our products which could reduce our future
revenues.
 
 Licensing our product candidates from
other companies, universities or individuals does not always prevent them from
developing non-identical but competitive products for their own commercial
purposes, nor from pursuing patent protection in areas that are competitive with
us. While we seek patent protection for all of our owned and licensed product
candidates, our licensors or assignors who created these product candidates are
experienced scientists and business people who may continue to do research and
development and seek patent protection in the same areas that led to the
discovery of the product candidates that they licensed or assigned to us. By
virtue of the previous research that led to the discovery of the drugs or
product candidates that they licensed or assigned to us, these companies,
universities, or individuals may be able to develop and market competitive
products in less time than might be required to develop a product with which
they have no prior experience and may reduce our future revenues from such
product candidates.
  Any
product revenues could be reduced by imports from countries where our product
candidates are available at lower prices.
 
 Even if we obtain FDA approval to
market our potential products in the United States, our sales in the United
States may be reduced if our products are imported into the United States from
lower priced markets, whether legally or illegally. In the United States, prices
for pharmaceuticals are generally higher than in the bordering nations of Canada
and Mexico. There have been proposals to legalize the import of pharmaceuticals
from outside the United States. If such legislation were enacted, our potential
future revenues could be reduced.
  The use of any of
our drug product candidates in clinical trials may expose us to liability
claims.
 
 The nature of our business exposes us
to potential liability risks inherent in the testing, manufacturing and
marketing of our drug product candidates. While we are in clinical stage
testing, our drug product candidates could potentially harm people or allegedly
harm people and we may be subject to costly and damaging product liability
claims. Some of the patients who participate in clinical trials are already
critically ill when they enter a trial. The waivers we obtain may not be
enforceable and may not protect us from liability or the costs of product
liability litigation. Although we currently carry a $3 million clinical product
liability insurance policy, it may not be sufficient to cover future claims. We
currently do not have any clinical or product liability claims or threats of
claims filed against us.
  Our future
success depends, in part, on the continued service of our management
team.
 
 Our success is dependent in part upon
the availability of our senior executive officers, including our Chief Executive
Officer, Dr. Christopher M. Starr, our Chief Scientific Officer, Dr. Todd C.
Zankel, our Chief Financial Officer, Kim R. Tsuchimoto, Ted Daley, the President
of our clinical development subsidiary and Dr. Patrice P. Rioux, Chief Medical
Officer of our clinical development subsidiary. The loss or unavailability to us
of any of these individuals or key research and development personnel, and
particularly if lost to competitors, could have a material adverse effect on our
business, prospects, financial condition, and operating results. We have no
key-man insurance on any of our employees.  There is intense
competition for qualified scientists and managerial personnel from numerous
pharmaceutical and biotechnology companies, as well as from academic and
government organizations, research institutions and other entities. In addition,
we will rely on consultants and advisors, including scientific and clinical
advisors, to assist us in formulating our research and development strategy. All
of our consultants and advisors will be employed by other employers or be
self-employed, and will have commitments to or consulting or advisory contracts
with other entities that may limit their availability to us. There is no
assurance that we will be able to retain key employees and/or consultants. If
key employees terminate their employment, or if insufficient numbers of
employees are retained to maintain effective operations, our development
activities might be adversely affected, management’s attention might be diverted
from managing our operations to hiring suitable replacements, and our business
might suffer. In addition, we might not be able to locate suitable replacements
for any key employees that terminate, or that are terminated from, their
employment with us and we may not be able to offer employment to potential
replacements on reasonable terms, which could negatively impact our product
candidate development timelines and may adversely affect our future revenues and
financial condition.
 
 
 -56-
 
  
   Our success
depends on our ability to manage our growth.
  If we are able to raise significant
additional financing, we expect to continue to grow, which could strain our
managerial, operational, financial and other resources. With the addition of our
clinical-stage programs and with our plan to in-license and acquire additional
clinical-stage product candidates, we will be required to retain experienced
personnel in the regulatory, clinical and medical areas over the next several
years. Also, as our preclinical pipeline diversifies through the acquisition or
in-licensing of new molecules, we will need to hire additional scientists to
supplement our existing scientific expertise over the next several
years.
 
 Our staff, financial resources,
systems, procedures or controls may be inadequate to support our operations and
our management may be unable to take advantage of future market opportunities or
manage successfully our relationships with third parties if we are unable to
adequately manage our anticipated growth and the integration of new
personnel.
  Our executive
offices and laboratory facility are located near known earthquake fault zones,
and the occurrence of an earthquake or other catastrophic disaster could cause
damage to our facility and equipment, or that of our third-party manufacturers
or single-source suppliers, which could materially impair our ability to
continue our product development programs.
 
 Our executive offices and laboratory
facility are located in the San Francisco Bay Area near known earthquake fault
zones and are vulnerable to significant damage from earthquakes. We and the
third-party manufacturers with whom we contract and our single-source suppliers
of raw materials are also vulnerable to damage from other types of disasters,
including fires, floods, power loss and similar events. If any disaster were to
occur, our ability to continue our product development programs, could be
seriously, or potentially completely impaired. The insurance we maintain may not
be adequate to cover our losses resulting from disasters or other business
interruptions.
  We will incur
increased costs as a result of recently enacted and proposed changes in laws and
regulations and our management will be required to devote substantial time to
comply with such laws and regulations.
 
 We face burdens relating to the recent
trend toward stricter corporate governance and financial reporting standards.
Legislation or regulations such as Section 404 of the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, as well as other rules implemented by the SEC
and NASDAQ, follow the trend of imposing stricter corporate governance and
financial reporting standards have led to an increase in the costs of compliance
for companies similar to us, including increases in consulting, auditing and
legal fees. New rules could make it more difficult or more costly for us to
obtain certain types of insurance, including directors’ and officers’ liability
insurance, and we may be forced to accept reduced policy limits and coverage or
incur substantially higher costs to obtain the same or similar coverage. The
impact of these events could also make it more difficult for us to attract and
retain qualified persons to serve on our board of directors, our board
committees or as executive officers. Failure to comply with these new laws and
regulations may impact market perception of our financial condition and could
materially harm our business. Additionally, it is unclear what additional laws
or regulations may develop, and we cannot predict the ultimate impact of any
future changes in law. Our management and other personnel will need to devote a
substantial amount of time to these requirements.
 
 In addition, the Sarbanes-Oxley Act
requires, among other things, that we maintain effective internal controls for
financial reporting and disclosure controls and procedures. In particular, we
must perform system and process evaluation and testing of our internal controls
over financial reporting to allow management to report on the effectiveness of
our internal controls over financial reporting, as required by Section 404 of
the Sarbanes-Oxley Act. Our compliance with Section 404 will require that we
incur substantial accounting and related expense and expend significant
management efforts. In the future, we may need to hire additional accounting and
financial staff to satisfy the ongoing requirements of Section 404. Moreover, if
we are not able to comply with the requirements of Section 404, or we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline and we could be subject
to sanctions or investigations by NASDAQ, the SEC or other regulatory
authorities.
 
 
 
 
 -57-
 
 
 
  
  We may be
required to suspend, repeat or terminate our clinical trials if they do not meet
regulatory requirements, the results are negative or inconclusive, or if the
trials are not well designed, which may result in significant negative
repercussions on our business and financial condition.
 
 Before regulatory approval for any
potential product can be obtained, we must undertake extensive clinical testing
on humans to demonstrate the tolerability and efficacy of the product, both on
our own terms, and as compared to the other principal drugs on the market that
have the same therapeutic indication. We cannot provide assurance that we will
obtain authorization to permit product candidates that are already in the
preclinical development phase to enter the human clinical testing phase. In
addition, we cannot provide assurance that any authorized preclinical or
clinical testing will be completed successfully within any specified time period
by us, or without significant additional resources or expertise to those
originally expected to be necessary. We cannot provide assurance that such
testing will show potential products to be safe and efficacious or that any such
product will be approved for a specific indication. Further, the results from
preclinical studies and early clinical trials may not be indicative of the
results that will be obtained in later-stage clinical trials. In addition, we or
regulatory authorities may suspend clinical trials at any time on the basis that
the participants are being exposed to unacceptable health risks.
 
 Completion of clinical tests depends
on, among other things, the number of patients available for testing, which is a
function of many factors, including the number of patients with the relevant
conditions, the nature of the clinical testing, the proximity of patients to
clinical testing centers, the eligibility criteria for tests as well as
competition with other clinical testing programs involving the same patient
profile but different treatments. We will rely on third parties, such as
contract research organizations and/or co-operative groups, to assist us in
overseeing and monitoring clinical trials as well as to process the clinical
results and manage test requests, which may result in delays or failure to
complete trials, if the third parties fail to perform or to meet the applicable
standards. A failure by us or such third parties to keep to the terms of a
product program development for any particular product candidate or to complete
the clinical trials for a product candidate in the envisaged time frame could
have significant negative repercussions on our business and financial
condition.
  If we fail to
establish and maintain collaborations or if our partners do not perform, we may
be unable to develop and commercialize our product candidates, which may
adversely affect our future revenues and financial
condition.
 
 We have entered into collaborative
arrangements with third parties to develop and/or commercialize product
candidates. Additional collaborations might be necessary in order for us to fund
our research and development activities and third-party manufacturing
arrangements, seek and obtain regulatory approvals and successfully
commercialize existing and future product candidates. If we fail to maintain the
existing collaborative arrangements held by us or fail to enter into additional
collaborative arrangements, the number of product candidates from which we could
receive future revenues would decline.
 
 Our dependence on collaborative
arrangements with third parties will subject us to a number of risks that could
harm our ability to develop and commercialize products:
 
 •
              
              collaborative
      arrangements might not be on terms favorable to us;•
              
              disagreements
      with partners may result in delays in the development and marketing of
      products, termination of collaboration agreements or time consuming and
      expensive legal action;•
              
              we
      cannot control the amount and timing of resources partners devote to
      product candidates or their prioritization of product candidates, and
      partners may not allocate sufficient funds or resources to the
      development, promotion or marketing of our product candidates, or may not
      perform their obligations as expected;•
              
              partners
      may choose to develop, independently or with other companies, alternative
      products or treatments, including products or treatments which compete
      with ours;
 
 •
              
              agreements
      with partners may expire or be terminated without renewal, or partners may
      breach collaboration agreements with us;•
              
              business
      combinations or significant changes in a partner’s business strategy might
      adversely affect that partner’s willingness or ability to complete their
      obligations to us; and•
              
              the
      terms and conditions of the relevant agreements may no longer be
      suitable.
 
 -58-
  
  We cannot
assure you that we will be able to negotiate future collaboration agreements or
that those currently in existence will make it possible for us to fulfill our
objectives.
 
 We may not
complete our clinical trials in the time expected, which could delay or prevent
the commercialization of our products, which may adversely affect our future
revenues and financial condition.
 
 Although for planning purposes we
forecast the commencement and completion of clinical trials, the actual timing
of these events can vary dramatically due to factors such as delays, scheduling
conflicts with participating clinicians and clinical institutions and the rate
of patient enrollment. Clinical trials involving our product candidates may not
commence nor be completed as forecasted. In certain circumstances we will rely
on academic institutions or clinical research organizations to conduct,
supervise or monitor some or all aspects of clinical trials involving our
product candidates. We will have less control over the timing and other aspects
of these clinical trials than if we conducted them entirely on our own. These
trials may not commence or be completed as we expect. They may not be conducted
successfully. Failure to commence or complete, or delays in, any of our planned
clinical trials could delay or prevent the commercialization of our product
candidates and harm our business and may adversely affect our future revenues
and financial condition.
  If we fail to
keep pace with rapid technological change in the biotechnology and
pharmaceutical industries, our product candidates could become obsolete, which
may adversely affect our future revenues and financial
condition.
 
 Biotechnology and related
pharmaceutical technology have undergone and are subject to rapid and
significant change. We expect that the technologies associated with
biotechnology research and development will continue to develop rapidly. Our
future will depend in large part on our ability to maintain a competitive
position with respect to these technologies. Any compounds, products or
processes that we develop may become obsolete before we recover any expenses
incurred in connection with developing such products, which may adversely affect
our future revenues and financial condition.
  
  If we are unable
to protect our proprietary technology, we may not be able to compete as
effectively and our business and financial prospects may be
harmed.
 
 Where appropriate, we seek patent
protection for certain aspects of our technology. Patent protection may not be
available for some of the drug product candidates we are developing. If we must
spend significant time and money protecting our patents, designing around
patents held by others or licensing, potentially for large fees, patents or
other proprietary rights held by others, our business and financial prospects
may be harmed.
  The patent
positions of biopharmaceutical products are complex and
uncertain.
 
 We own or license patent applications
related to certain of our drug product candidates. However, these patent
applications do not ensure the protection of our intellectual property for a
number of reasons, including the following:
 
 •
              
              We
      do not know whether our patent applications will result in issued patents.
      For example, we may not have developed a method for treating a disease
      before others developed similar
methods.
 
 •
              
              Competitors
      may interfere with our patent process in a variety of ways. Competitors
      may claim that they invented the claimed invention prior to us.
      Competitors may also claim that we are infringing on their patents and
      therefore cannot practice our technology as claimed under our patents, if
      issued. Competitors may also contest our patents, if issued, by showing
      the patent examiner that the invention was not original, was not novel or
      was obvious. In litigation, a competitor could claim that our patents, if
      issued, are not valid for a number of reasons. If a court agrees, we would
      lose that patent. As a company, we have no meaningful experience with
      competitors interfering with our patents or patent
      applications.•
              
              Enforcing
      patents is expensive and may absorb significant time of our management.
      Management would spend less time and resources on developing drug product
      candidates, which could increase our operating expenses and delay product
      programs.•
              
              Receipt
      of a patent may not provide much practical protection. If we receive a
      patent with a narrow scope, then it will be easier for competitors to
      design products that do not infringe on our
  patent.
 -59-
  
  
 •
              
              In
      addition, competitors also seek patent protection for their technology.
      Due to the number of patents in our field of technology, we cannot be
      certain that we do not infringe on those patents or that we will not
      infringe on patents granted in the future. If a patent holder believes our
      drug product candidate infringes on its patent, the patent holder may sue
      us even if we have received patent protection for our technology. If
      someone else claims we infringe on their technology, we would face a
      number of issues, including the following:•
              
              Defending
      a lawsuit takes significant time and can be very
  expensive.•
              
              If
      a court decides that our drug product candidate infringes on the
      competitor’s patent, we may have to pay substantial damages for past
      infringement.•
              
              A
      court may prohibit us from selling or licensing the drug product candidate
      unless the patent holder licenses the patent to us. The patent holder is
      not required to grant us a license. If a license is available, we may have
      to pay substantial royalties or grant cross licenses to our
      patents.•
              
              Redesigning
      our drug product candidates so we do not infringe may not be possible or
      could require substantial funds and
time.
 
 It is also unclear whether our trade
secrets are adequately protected. While we use reasonable efforts to protect our
trade secrets, our employees or consultants may unintentionally or willfully
disclose our information to competitors. Enforcing a claim that someone else
illegally obtained and is using our trade secrets, like patent litigation, is
expensive and time consuming, and the outcome is unpredictable. In addition,
courts outside the U.S. are sometimes less willing to protect trade secrets. Our
competitors may independently develop equivalent knowledge, methods and
know-how.   We may also support and collaborate in research
conducted by government organizations, hospitals, universities or other
educational institutions. These research partners may be unwilling to grant us
any exclusive rights to technology or products derived from these collaborations
prior to entering into the relationship. If we do not obtain required licenses
or rights, we could encounter delays in our product development efforts while we
attempt to design around other patents or even be prohibited from developing,
manufacturing or selling drug product candidates requiring these licenses. There
is also a risk that disputes may arise as to the rights to technology or drug
product candidates developed in collaboration with other parties.
 
 If our agreements
with employees, consultants, advisors and corporate partners fail to protect our
intellectual property, proprietary information or trade secrets, it could have a
significant adverse effect on us.
 
 We have taken steps to protect our
intellectual property and proprietary technology, by entering into
confidentiality agreements and intellectual property assignment agreements with
our employees, consultants, advisors and corporate partners. Such agreements may
not be enforceable or may not provide meaningful protection for our trade
secrets or other proprietary information in the event of unauthorized use or
disclosure or other breaches of the agreements, and we may not be able to
prevent such unauthorized disclosure. Monitoring unauthorized disclosure is
difficult, and we do not know whether the steps we have taken to prevent such
disclosure are, or will be, adequate. Furthermore, the laws of some foreign
countries may not protect our intellectual property rights to the same extent as
do the laws of the United States.
  Risks Related to Our Common
Stock
 
 There
are a substantial number of shares of our common stock eligible for future sale
in the public market, and the issuance or sale of equity, convertible or
exchangeable securities in the market, or the perception of such future sales or
issuances, could lead to a decline in the trading price of our common
stock.
 
 Any issuance of equity, convertible or
exchangeable securities, including for the purposes of financing acquisitions
and the expansion of our business, may have a dilutive effect on our existing
stockholders. In addition, the perceived risk associated with the possible
issuance of a large number of shares of our common stock or securities
convertible or exchangeable into a large number of shares of our common stock
could cause some of our stockholders to sell their common stock, thus causing
the trading price of our common stock to decline. Subsequent sales of our common
stock in the open market or the private placement of our common stock or
securities convertible or exchangeable into our common stock could also have an
adverse effect on the trading price of our common stock. If our common stock
price declines, it may be more difficult for us to or we may be unable to raise
additional capital.
  
  -60-
  
   In addition, future sales of
substantial amounts of our currently outstanding common stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing trading prices of our common stock, and could impair our ability to
raise capital through future offerings of equity or equity-related securities.
We cannot predict what effect, if any, future sales of our common stock, or the
availability of shares for future sales, will have on the trading price of our
common stock.
 
 In May and June 2008, prior to our
merger with Raptor Pharmaceuticals Corp. in 2009, pursuant to a securities
purchase agreement for a private placement of units, Raptor Pharmaceuticals
Corp. issued to investors in such private placement, 20,000,000 shares of its
common stock and two-year warrants to purchase up to, in the aggregate,
10,000,000 shares of its common stock and to placement agents in such private
placement, five-year warrants to purchase up to, in the aggregate, 2,100,000
shares of its common stock.  On a post-merger basis, the 20,000,000
shares of Raptor Pharmaceuticals Corp.’s common stock, the two-year warrants to
purchase up to, in the aggregate, 10,000,000 shares of Raptor Pharmaceuticals
Corp.’s common stock and the five-year warrants to purchase up to, in the
aggregate, 2,100,000 shares of Raptor Pharmaceuticals Corp.’s common stock,
respectively, would be 4,662,468 shares of our common stock, two-year warrants
to purchase up to, in the aggregate, 2,331,234 shares of our common stock and
the five-year warrants to purchase up to, in the aggregate, 489,559 shares of
our common stock, respectively.
 
 In April 2009, in order to reflect
then-current market prices, Raptor Pharmaceuticals Corp. notified the holders of
warrants purchased in the May/June 2008 private placement that it was offering,
in exchange for such warrants, new warrants to purchase its common stock at an
exercise price of $0.30 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 warrants that
were not exchanged prior to or on July 17, 2009 retained their original exercise
prices of $0.90 per share and original expiration date of May 21,
2010.  On a post-merger basis, the warrants that were not exchanged
prior to or on July 17, 2009 would be warrants to purchase shares of our common
stock at an exercise price of $3.86 per share and would continue to have an
expiration date of May 21, 2010.  Raptor Pharmaceuticals Corp.
received approximately $2.6 million of proceeds from warrant exercises that
resulted in the issuance of 8,715,000 shares of its common stock pursuant to the
exchange described above. On a post-merger basis, the 8,715,000 shares of Raptor
Pharmaceuticals Corp.’s common stock would be 2,031,670 shares of our common
stock.
 
 In August 2009, pursuant to a
securities purchase agreement for a private placement of units, Raptor
Pharmaceuticals Corp. issued to investors in such private placement, 7,456,250
shares of its common stock and two-year warrants to purchase up to, in the
aggregate, 3,728,125 shares of its common stock and to placement agents in such
private placement, a five-year warrant to purchase up to, in the aggregate,
556,500 shares of its common stock.  On a post-merger basis, the
7,456,250 shares of Raptor Pharmaceuticals Corp.’s common stock, the two-year
warrants to purchase up to, in the aggregate, 3,728,125 shares of Raptor
Pharmaceuticals Corp.’s common stock and the five-year warrants to purchase up
to, in the aggregate, 556,500 shares of Raptor Pharmaceuticals Corp.’s common
stock, respectively, would be 1,738,226 shares of our common stock, two-year
warrants to purchase up to, in the aggregate, 869,113 shares of our common stock
and the five-year warrants to purchase up to, in the aggregate, 129,733 shares
of our common stock, respectively.
 
 In December 2009, the we entered into a
definitive securities purchase agreement or the Purchase Agreement, dated as of
December 17, 2009, with 33 investors set forth on the signature pages thereto,
collectively, the Investors, with respect to the offering of Units, whereby, on
an aggregate basis, the Investors agreed to purchase 3,747,558 Units for a
negotiated purchase price of $2.00 per Unit for aggregate gross proceeds of
approximately $7.5 million.  Each Unit consists of one share of our
common stock, one Series A Warrant exercisable for 0.5 of a share of our common
stock and one Series B Warrant exercisable for 0.5 of a share of our common
stock.  Units will not be issued or certificated. The shares of our
common stock and the Warrants will be 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.  In connection with this offering we paid a placement agent
cash compensation equaled to 6.5% of the gross proceeds or $487,183 plus a a
five-year warrant at an exercise price of $2.50 for the purchase of up to 74,951
shares of our common stock, on the same terms as the investor warrants described
above.
 
 These
stock issuances and other future issuances of common stock underlying unexpired
and unexercised warrants have and will result in, significant dilution to our
stockholders.   In connection with other collaborations, joint
ventures, license agreements or future financings that we may enter into in the
future, we may issue additional shares of common stock or other equity
securities, and the value of the securities issued may be substantial and create
additional dilution to our existing and future common stockholders.
  -61-
  
  As of December 23, 2009, after the
financing described in the previous paragraph, there were 22,579,515 shares of
our common stock outstanding. We also had outstanding as of December 23, 2009
warrants that are exercisable to purchase an aggregate of 5,843,302 shares of
our common stock at a weighted average exercise price of $2.66 per share. 
On October 13, 2009, we filed a registration statement registering the resale of
up to an aggregate of 5,557,865 shares of our common stock (including common
stock issuable under warrants).  Such registration statement was
declared effective by the SEC on November 12, 2009.
 
 In addition to our outstanding
warrants, as of December 23, 2009, there were (i) options to purchase
1,037,688 shares of our common stock outstanding under our 2006 Raptor
Pharmaceutical Equity Incentive Plan at a weighted-average exercise price of
$2.47, (ii) options to purchase 158,475 shares of our common stock
outstanding under our 2006 TorreyPines Therapeutics Equity Incentive Plan at a
weighted-average exercise price of $114.12, (iii) 355,557 shares of our common
stock available for issuance under our 2006 Raptor Pharmaceutical Equity
Incentive Plan (of which all such shares are subject to approval by our
stockholders at our 2010 Annual Meeting of stockholders) and (iv) 852,547 shares
of our common stock available for issuance under our 2006 TorreyPines
Therapeutics Equity Incentive Plan.  The shares issuable under our
equity incentive plans will be available for immediate resale in the public
market.  The shares issuable under the warrants are available for immediate
resale in the public market. The market price of our common stock could decline
as a result of such resales due to the increased number of shares available for
sale in the market.
  Our executive officers and directors
are subject to lock-up agreements pursuant to the Purchase Agreement executed in
our December 2009 financing.  Each lock-up agreement is for a period
of 90 days commencing on December 18, 2009, and represent 1,728,022 shares,
or 7.7% of our outstanding common stock as of December 23, 2009 (taking into
account the 3,747,558 shares of common stock sold in the December 2009
financing). Following the termination of this lock-up period, these stockholders
will have the ability to sell a substantial number of shares of common stock in
the public market in a short period of time. Sales of a substantial number of
shares of common stock in the public trading market, whether in a single
transaction or a series of transactions, or the perception that these sales may
occur, could also have a significant effect on volatility and the trading price
of our common stock.
 
 Future milestone payments, as more
fully set forth under “Contractual Obligations with Thomas E. Daley (as assignee
of the dissolved Convivia, Inc.)” and “Contractual Obligations with Former
Encode Securityholders” discussed in certain of our periodic filings with the
SEC relating to our acquisition of the Convivia assets and merger with Encode
will result in dilution. We may be required to make additional contingent
payments of up to 664,400 shares of our common stock, in the aggregate, under
the terms of our acquisition of Convivia assets and merger with Encode, based on
milestones related to certain future marketing and development approvals
obtained with respect to Convivia and Encode product candidates. The issuance of
any of these shares will result in further dilution to our existing
stockholders.
  Because
we do not intend to pay any cash dividends on our common stock, investors will
benefit from an investment in our common stock only if it appreciates in
value.  Investors seeking dividend income or liquidity should not
purchase shares of our common stock.
  We have not declared or paid any cash
dividends on our common stock since our inception.  We anticipate that
we will retain our future earnings, if any, to support our operations and to
finance the growth and development of our business and do not expect to pay cash
dividends in the foreseeable future. As a result, the success of an investment
in our common stock will depend upon any future appreciation in the value of our
common stock. There is no guarantee that our common stock will appreciate in
value or even maintain its current price.  Investors seeking dividend
income or liquidity should not invest in our common stock.
  Our stock price
is volatile, which could result in substantial losses for our stockholders, and
the trading in our common stock may be limited.
   Our common stock is quoted on The
Nasdaq Capital Market. The trading price of our common stock has been and may
continue to be volatile. Our operating performance does and will continue to
significantly affect the market price of our common stock.  We face a
number of risks including those described herein, which may negatively impact
the price of our common stock.
  
  -62-
  
   The
market price of our common stock also may be adversely impacted by broad market
and industry fluctuations regardless of our operating performance, including
general economic and technology trends. The Nasdaq Capital Market has, from time
to time, experienced extreme price and trading volume fluctuations, and the
market prices of biopharmaceutical development companies such as ours have been
extremely volatile.  Market prices for securities of early-stage
pharmaceutical, biotechnology and other life sciences companies have
historically been particularly volatile and trading in such securities has often
been limited. Some of the factors that may cause the market price of our common
stock to fluctuate include:
 
 •
              
              the
      results of our current and any future clinical trials of our drug
      candidates;•
              
              the
      results of ongoing preclinical studies and planned clinical trials of our
      preclinical drug candidates;•
              
              the
      entry into, or termination of, key agreements, including key strategic
      alliance agreements;•
              
              the
      results and timing of regulatory reviews relating to the approval of our
      drug candidates;•
              
              the
      initiation of, material developments in, or conclusion of litigation to
      enforce or defend any of our intellectual property
  rights;•
              
              failure
      of any of our drug candidates, if approved, to achieve commercial
      success;•
              
              general
      and industry-specific economic conditions that may affect our research and
      development expenditures;•
              
              the
      results of clinical trials conducted by others on drugs that would compete
      with our drug candidates;•
              
              issues
      in manufacturing our drug candidates or any approved
    products;•
              
              the
      loss of key employees;•
              
              the
      introduction of technological innovations or new commercial products by
      our competitors;•
              
              Changes
      in estimates or recommendations by securities analysts, if any, who cover
      our common stock;•
              
              future
      sales of our common stock;•
              
              Changes
      in the structure of health care payment systems; and•
              
              period-to-period
      fluctuations in our financial
results.
 
 Moreover, the stock markets in general
have experienced substantial volatility that has often been unrelated to the
operating performance of individual companies. These broad market fluctuations
may also adversely affect the trading price of our common stock.  In
the past, following periods of volatility in the market price of a company’s
securities, stockholders have often instituted class action securities
litigation against those companies. Such litigation can result in substantial
costs and diversion of management attention and resources, which could
significantly harm our profitability and reputation.
  Our stock is a
penny stock. Trading of our stock may be restricted by the SEC’s penny stock
regulations and the FINRA’s sales practice requirements, which may limit a
stockholder’s ability to buy and sell our stock.
  Our common stock is a penny stock. The
SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. Our
securities are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than
established customers and institutional accredited investors. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the SEC which provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-
   -63-
   
   dealer
and salesperson compensation information, must be given to the customer orally
or in writing prior to effecting the transaction and must be given to the
customer in writing before or with the customer’s confirmation. In addition, the
penny stock rules require that prior to a transaction in a penny stock not
otherwise exempt from these rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for the stock that is subject to these penny
stock rules. Consequently, these penny stock rules may affect the ability of
broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common
stock.
  In addition to the “penny stock” rules
promulgated by the SEC, the Financial Industry Regulatory Authority, or FINRA,
has adopted rules that require that in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the investment
is suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, the FINRA believes that there is a high probability that
speculative low priced securities will not be suitable for at least some
customers. The FINRA requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may limit your
ability to buy and sell our stock.
 
  An adverse
determination, if any, in the class action suit in which we are a defendant, or
our inability to obtain or maintain directors’ and officers’ liability
insurance, could have a material adverse affect on us.
 
 A class action securities lawsuit was
filed against us, as described in the section titled, “Legal Proceedings” in
certain of our periodic reports that we file with the SEC. We are defending
against this action vigorously; however, we do not know what the outcome of the
proceedings will be and, if we do not prevail, we may be required to pay
substantial damages or settlement amounts. Furthermore, regardless of the
outcome, we may incur significant defense costs, and the time and attention of
our key management may be diverted from normal business operations. If we are
ultimately required to pay significant defense costs, damages or settlement
amounts, such payments could materially and adversely affect our operations and
results. We have purchased liability insurance, however, if any costs or
expenses associated with the litigation exceed the insurance coverage, we may be
forced to bear some or all of these costs and expenses directly, which could be
substantial and may have an adverse effect on our business, financial condition,
results of operations and cash flows. In any event, publicity surrounding the
lawsuits and/or any outcome unfavorable to us could adversely affect our
reputation and stock price. The uncertainty associated with substantial
unresolved lawsuits could harm our business, financial condition and
reputation.   We have certain obligations to indemnify our
officers and directors and to advance expenses to such officers and directors.
Although we have purchased liability insurance for our directors and officers,
if our insurance carriers should deny coverage, or if the indemnification costs
exceed the insurance coverage, we may be forced to bear some or all of these
indemnification costs directly, which could be substantial and may have an
adverse effect on our business, financial condition, results of operations and
cash flows. If the cost of the liability insurance increases significantly, or
if this insurance becomes unavailable, we may not be able to maintain or
increase our levels of insurance coverage for our directors and officers, which
could make it difficult to attract or retain qualified directors and
officers.
  We
can issue shares of preferred stock that may adversely affect the rights of a
stockholder of our common stock.
  
  Our certificate of incorporation
authorizes us to issue up to 15,000,000 shares of preferred stock with
designations, rights and preferences determined from time-to-time by our board
of directors. Accordingly, our board of directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights superior to those of stockholders of our
common stock.
  Anti-takeover
provisions under Delaware law, in our stockholder rights plan and in our
certificate of incorporation and bylaws may prevent or complicate attempts by
stockholders to change the board of directors or current management and could
make a third-party acquisition of us difficult.
 
 
 We are incorporated in Delaware.
Certain anti-takeover provisions of Delaware law as currently in effect may make
a change in control of our Company more difficult, even if a change in control
would be beneficial to the stockholders.   Our board of directors
has the authority to issue up to 15,000,000 shares of preferred stock, none of
which are issued or outstanding. The rights of holders of our common stock are
subject to the rights of the holders of any preferred stock that may be issued.
The issuance of preferred stock could make it more difficult for a third-party
to acquire a majority of our outstanding voting stock. Our charter contains
provisions that may enable our
 
 -64-
  
  management
to resist an unwelcome takeover attempt by a third party, including: a
prohibition on actions by written consent of our stockholders; the fact that
stockholder meetings must be called by our board of directors; and provisions
requiring stockholders to provide advance notice of proposals. Delaware law also
prohibits corporations from engaging in a business combination with any holders
of 15% or more of their capital stock until the holder has held the stock for
three years unless, among other possibilities, the board of directors approves
the transaction. Our board of directors may use these provisions to prevent
changes in the management and control of our Company. Also, under applicable
Delaware law, our board of directors may adopt additional anti-takeover measures
in the future.
 
 We are a party to a stockholder rights
plan, also referred to as a poison pill, which is intended to deter a hostile
takeover of us by making such proposed acquisition more expensive and less
desirable to the potential acquirer. The stockholder rights plan and our
certificate of incorporation and bylaws, as amended, contain provisions that may
discourage, delay or prevent a merger, acquisition or other change in control
that stockholders may consider favorable, including transactions in which
stockholders might otherwise receive a premium for their shares. These
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock.
  Item
2.             Unregistered
Sales of Equity Securities and Use of Proceeds.
 None.
 
 Item
3.                      Defaults Upon Senior
Securities.
 None.
 
 Item
4.                      
Submission of Matters to a Vote of Security Holders.
 The
following items were submitted for a stockholder vote at our annual meeting,
held on September 28, 2009, and such items were approved by a majority of our
shares issued and outstanding on the record date, August 27, 2009, for such
meeting:
 A
proposal to approve the issuance of our common stock and the resulting change in
control pursuant to that certain Agreement and Plan of Merger and
Reorganization, dated as of July 27, 2009, by and among us, ECP Acquisition,
Inc. and Raptor Pharmaceuticals Corp.
   A
proposal to approve an amendment to our certificate of incorporation effecting
the reverse stock split at one of seventeen reverse split ratios: 1-for-10,
1-for-11, 1-for-12, 1-for-13, 1-for-14, 1-for-15, 1-for-17, 1-for-20, 1-for-25,
1-for-30, 1-for-35, 1-for-40, 1-for-45, 1-for-50, 1-for-55, 1-for-60 or
1-for-70.
   A
proposal to approve an amendment to our certificate of incorporation to change
our corporate name from "TorreyPines Therapeutics, Inc." to "Raptor
Pharmaceutical Corp."
   A
proposal to approve any motion to adjourn our annual meeting, if necessary, to
solicit additional proxies if there are not sufficient votes in favor of
TorreyPines Proposal Nos. 1, 2 and 3.
   Each of
Peter Davis, Ph.D., Steven H. Ferris, Ph.D., Evelyn Graham and Steven Ratoff,
were nominated to our board of directors at such annual meeting. Immediately
after the consummation of the 2009 Merger, the following persons were appointed
to our board of directors: Christopher M. Starr, Ph.D., Erich Sager, Raymond W.
Anderson, Richard L. Franklin, M.D., Ph.D. and Llew Keltner, M.D., Ph.D., and at
such time, each of Peter Davis, Ph.D., Steven H. Ferris, Ph.D., Evelyn Graham
and Steven Ratoff resigned from our board of directors.
 Item
5.                      Other
Information.
 None.
 
 Exhibit
      Index(2)
              Plan
      of Acquisition, reorganization, arrangement, liquidation or
      succession2.1
              Agreement
      and Plan of Merger and Reorganization, dated as of June 7, 2006, by
      and among Axonyx Inc., Autobahn Acquisition, Inc. and TorreyPines
      Therapeutics, Inc. (incorporated by reference to Annex A to
      Registration Statement No. 333-136018 filed on July 25,
      2006).2.2
              Amendment
      No. 1 to Agreement and Plan of Merger and Reorganization, dated as of
      August 25, 2006, by and among Axonyx Inc., Autobahn
      Acquisition, Inc. and TorreyPines Therapeutics, Inc.
      (incorporated by reference to Annex A to Amendment No. 1 to
      Registration Statement No. 333-136018 filed on August 25,
      2006).2.3
              Agreement
      and Plan of Merger and Reorganization, dated July 27, 2009, by and
      among Raptor Pharmaceuticals Corp., TorreyPines Therapeutics, Inc., a
      Delaware corporation, and ECP Acquisition, Inc., a Delaware corporation
      (incorporated by reference to Exhibit 2.3 to the Registrant’s Current
      Report on Form 8-K, filed on July 28, 2009)(3)(i),
      (ii)
              Articles
      of incorporation; Bylaws3.1
              Certificate
      of Incorporation of the Registrant (incorporated by reference to
      Exhibit 3.1 to the Registrant’s Current Report on Form 8-K,
      filed on October 10, 2006)3.2
              Bylaws
      of the Registrant (incorporated by reference to Exhibit 3.2 to the
      Registrant’s Current Report on Form 8-K, filed on October 10,
      2006).3.3
              Certificate
      of Amendment filed with the Secretary of State of the State of Nevada
      effecting an 8-for-1 reverse stock of the Registrant’s common stock and
      changing the name of the Registrant from Axonyx Inc. to TorreyPines
      Therapeutics, Inc. (incorporated by reference to Exhibit 3.3 to
      the Registrant’s Current Report on Form 8-K, filed on
      October 10, 2006).3.4
              Articles
      of Conversion filed with the Secretary of State of the State of Nevada
      changing the state of incorporation of the Registrant (incorporated by
      reference to Exhibit 3.4 to the Registrant’s Current Report on
      Form 8-K, filed on October 10, 2006)3.5
              Certificate
      of Conversion filed with the Secretary of State of the State of Delaware
      (incorporated by reference to Exhibit 3.5 to the Registrant’s Current
      Report on Form 8-K, filed on October 10,
  2006).3.6
              Amendment
      to Bylaws of the Registrant (incorporated by reference to Exhibit 3.6 to
      the Registrant’s Annual Report on Form 10-K, filed on March 29,
      2007).3.7
              Charter
      Amendment for TorreyPines (incorporated by reference to Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K, filed on
      October 9, 2009)3.8
              Certificate of Merger between
      Raptor Pharmaceuticals Corp. and ECP Acquisition, Inc.TorreyPines
      (incorporated by reference to Exhibit 3.2 to the Registrant’s Current
      Report on Form 8-K, filed on October 9, 2009)(4)
              Instruments
      defining the rights of security holders, including
    indentures4.1
              Specimen
      common stock certificate of the Registrant (incorporated by reference to
      Exhibit 4.7 to the Registrant’s Current Report on Form 8-K,
      filed on October 9, 2009)4.2
              Form of
      Warrant to Purchase Common Stock issued to previous holders of
      TPTX, Inc. redeemable convertible preferred stock in connection with
      the business combination between TorreyPines Therapeutics, Inc. and
      Axonyx, Inc. (incorporated by reference to Exhibit 4.2 to the
      Registrant’s Annual Report on Form 10-K, filed on March 29,
      2007).4.3
              Form
      of Registration Rights Agreement 1999 (incorporated by reference to
      Exhibit 4.4 to the Registrant’s Annual Report on Form 10-KSB, filed
      on March 13,
      2000).                                          -65-4.4
              Registration
      Rights Agreement dated as of January 8, 2004 between Axonyx Inc. and
      certain investors (incorporated by reference to Exhibit 4.2 in the
      Current Report on Form 8-K, filed on January 12,
      2004).4.5
              Registration
      Rights Agreement dated as of May 3, 2004, between Axonyx Inc. and
      certain investors (incorporated by reference to Exhibit 4.2 to the
      Registrant’s Current Report on Form 8-K, filed on May 5,
      2004).4.6
              Form of
      Warrant issued to Comerica Bank on July 1, 2003 (incorporated by
      reference to Exhibit 4.14 to the Registrant’s Annual Report on Form 10-K,
      filed on March 29, 2007)4.7
              Form of
      Warrant issued to Silicon Valley Bank on December 8, 2000
      (incorporated by reference to Exhibit 4.15 to the Registrant’s Annual
      Report on Form 10-K, filed on March 29, 2007).4.8
              Form of
      Warrant issued to Oxford Financial and Silicon Valley Bank on
      September 27, 2005 (incorporated by reference to Exhibit 4.16 to the
      Registrant’s Annual Report on Form 10-K, filed on March 29,
      2007).4.9
              Rights
      Agreement, dated as of May 13, 2005, between the Registrant and The
      Nevada Agency and Trust Company, as Rights Agent (incorporated by
      reference to Exhibit 99.2 to the Registrant’s Current Report on
      Form 8-K, filed on May 16, 2005).4.10
              Amendment
      to Rights Agreement, dated as of June 7, 2006, between the Registrant
      and The Nevada Agency and Trust Company, as Rights Agent
      (incorporated by reference to Exhibit 4.1 to the Registrant’s Current
      Report on Form 8-K, filed on June 12, 2006).4.11
              Form
      of Warrant issued to Comerica Bank on June 11, 2008 (incorporated by
      reference to Exhibit 4.1 to the Registrant’s Report on Form 8-K, filed on
      June 17, 2008).4.12
              Amendment
      to Rights Agreement, dated as of October 3, 2006, between the
      Registrant and The Nevada Agency and Trust Company, as Rights Agent
      (incorporated by reference to Exhibit 4.19 to the Registrant’s Annual
      Report on Form 10-K, filed on March 29, 2007).4.13
              Rights
      Agreement Amendment, dated as of July 27, 2009, to the Rights Agreement
      dated May 13, 2005 between TorreyPines and American Stock Transfer and
      Trust Company (replacing The Nevada Agency and Trust Company)
      (incorporated by reference to Exhibit 2.3 to the Registrant’s Current
      Report on Form 8-K, filed on July 28, 2009).4.14
      *
              Warrant to purchase common stock
      dated December 14, 2007 issued to Flower Ventures, LLC(incorporated by reference to Exhibit 4.1 to Raptor Pharmaceuticals Corp.’s
      Quarterly Reporton Form 10QSB/A, filed on April
      15, 2008).4.15
      *
              Warrant
      to purchase common stock dated December 14, 2007 issued to ICON Partners,
      LP (incorporated by
      reference to Exhibit 4.2 toRaptor Pharmaceuticals Corp.’s
      Quarterly Report on Form10QSB/A, filed on
      April 15, 2008).4.16
      *
              Form
      of Warrant to purchase common stock of Raptor Pharmaceuticals Corp. (incorporated by reference to
      Exhibit 4.1 toRaptor Pharmaceuticals Corp.’s Current Report on Form8-K, filed on May 22,
      2008).4.17
      *
              Form
      of Placement Agent Warrant to purchase common stock of Raptor
      Pharmaceuticals Corp. (incorporated by reference to
      Exhibit 4.2 toRaptor Pharmaceuticals Corp.’s Current Report on Form8-K/A, filed on May 28,
      2008).4.18
      *
              Form
      of Warrant to purchase common stock of Raptor Pharmaceuticals Corp. (incorporated by reference to
      Exhibit 4.1 toRaptor Pharmaceuticals Corp.’s Current Report on Form8-K, filed on August 25,
      2009).4.19
      *
              Form
      of Placement Agent Warrant to purchase common stock of Raptor
      Pharmaceuticals Corp. (incorporated by reference to
      Exhibit 4.2 toRaptor Pharmaceuticals Corp.’s Current Report on Form8-K, filed on August 25,
      2009).4.20
              Reference
      is made to Exhibits 3.1 through 3.6.(31)
              Section
      302 Certification31.1
              Certification
      of Christopher M. Starr, Ph.D., Chief Executive Officer and
      Director31.2
              Certification
      of Kim R. Tsuchimoto, Chief Financial Officer, Secretary and
      Treasurer(32)
              Section
      906 Certification32.1
              Certification
      of Christopher M. Starr, Ph.D., Chief Executive Officer and Director, and
      of Kim R. Tsuchimoto, Chief Financial Officer, Secretary and
      Treasurer*
              The
      Raptor Pharmaceuticals Corp. warrants set forth in Exhibits 4.14 -
      4.19 have been converted into warrants of the Registrant and the
      exercise price of such warrants and number of shares of common stock
      issuable thereunder have been converted as described in Item 1.01 (under
      the section titled, “Background”) of the Registrant’s Current Report on
      Form 8-K, filed on October 5,
2009.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -66-
  
  
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
  RAPTOR
PHARMACEUTICAL CORP.
  
  By: /s/ Christopher M.
Starr
 Christopher
M. Starr, Ph.D.
 Chief
Executive Officer and Director
 (Principal
Executive Officer)
 Date:  January
14, 2010
  By: /s/ Kim R.
Tsuchimoto
 Kim R.
Tsuchimoto
 Chief
Financial Officer, Secretary and Treasurer
 (Principal
Financial Officer and Principal Accounting Officer)
 Date:
January 14, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -67-
  
  
 
 
 
 
 Exhibit
      Index(2)
              Plan
      of Acquisition, reorganization, arrangement, liquidation or
      succession2.1
              Agreement
      and Plan of Merger and Reorganization, dated as of June 7, 2006, by
      and among Axonyx Inc., Autobahn Acquisition, Inc. and TorreyPines
      Therapeutics, Inc. (incorporated by reference to Annex A to
      Registration Statement No. 333-136018 filed on July 25,
      2006).2.2
              Amendment
      No. 1 to Agreement and Plan of Merger and Reorganization, dated as of
      August 25, 2006, by and among Axonyx Inc., Autobahn
      Acquisition, Inc. and TorreyPines Therapeutics, Inc.
      (incorporated by reference to Annex A to Amendment No. 1 to
      Registration Statement No. 333-136018 filed on August 25,
      2006).2.3
              Agreement
      and Plan of Merger and Reorganization, dated July 27, 2009, by and
      among Raptor Pharmaceuticals Corp., TorreyPines Therapeutics, Inc., a
      Delaware corporation, and ECP Acquisition, Inc., a Delaware corporation
      (incorporated by reference to Exhibit 2.3 to the Registrant’s Current
      Report on Form 8-K, filed on July 28, 2009)(3)(i),
      (ii)
              Articles
      of incorporation; Bylaws3.1
              Certificate
      of Incorporation of the Registrant (incorporated by reference to
      Exhibit 3.1 to the Registrant’s Current Report on Form 8-K,
      filed on October 10, 2006)3.2
              Bylaws
      of the Registrant (incorporated by reference to Exhibit 3.2 to the
      Registrant’s Current Report on Form 8-K, filed on October 10,
      2006).3.3
              Certificate
      of Amendment filed with the Secretary of State of the State of Nevada
      effecting an 8-for-1 reverse stock of the Registrant’s common stock and
      changing the name of the Registrant from Axonyx Inc. to TorreyPines
      Therapeutics, Inc. (incorporated by reference to Exhibit 3.3 to
      the Registrant’s Current Report on Form 8-K, filed on
      October 10, 2006).3.4
              Articles
      of Conversion filed with the Secretary of State of the State of Nevada
      changing the state of incorporation of the Registrant (incorporated by
      reference to Exhibit 3.4 to the Registrant’s Current Report on
      Form 8-K, filed on October 10, 2006)3.5
              Certificate
      of Conversion filed with the Secretary of State of the State of Delaware
      (incorporated by reference to Exhibit 3.5 to the Registrant’s Current
      Report on Form 8-K, filed on October 10,
  2006).3.6
              Amendment
      to Bylaws of the Registrant (incorporated by reference to Exhibit 3.6 to
      the Registrant’s Annual Report on Form 10-K, filed on March 29,
      2007).3.7
              Charter
      Amendment for TorreyPines (incorporated by reference to Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K, filed on
      October 9, 2009)3.8
              Certificate of Merger between
      Raptor Pharmaceuticals Corp. and ECP Acquisition, Inc.TorreyPines
      (incorporated by reference to Exhibit 3.2 to the Registrant’s Current
      Report on Form 8-K, filed on October 9, 2009)(4)
              Instruments
      defining the rights of security holders, including
    indentures4.1
              Specimen
      common stock certificate of the Registrant (incorporated by reference to
      Exhibit 4.7 to the Registrant’s Current Report on Form 8-K,
      filed on October 9, 2009)4.2
              Form of
      Warrant to Purchase Common Stock issued to previous holders of
      TPTX, Inc. redeemable convertible preferred stock in connection with
      the business combination between TorreyPines Therapeutics, Inc. and
      Axonyx, Inc. (incorporated by reference to Exhibit 4.2 to the
      Registrant’s Annual Report on Form 10-K, filed on March 29,
      2007).4.3
              Form
      of Registration Rights Agreement 1999 (incorporated by reference to
      Exhibit 4.4 to the Registrant’s Annual Report on Form 10-KSB, filed
      on March 13, 2000).4.4
              Registration
      Rights Agreement dated as of January 8, 2004 between Axonyx Inc. and
      certain investors (incorporated by reference to Exhibit 4.2 in the
      Current Report on Form 8-K, filed on January 12,
      2004).4.5
              Registration
      Rights Agreement dated as of May 3, 2004, between Axonyx Inc. and
      certain investors (incorporated by reference to Exhibit 4.2 to the
      Registrant’s Current Report on Form 8-K, filed on May 5,
      2004).4.6
              Form of
      Warrant issued to Comerica Bank on July 1, 2003 (incorporated by
      reference to Exhibit 4.14 to the Registrant’s Annual Report on Form 10-K,
      filed on March 29, 2007)4.7
              Form of
      Warrant issued to Silicon Valley Bank on December 8, 2000
      (incorporated by reference to Exhibit 4.15 to the Registrant’s Annual
      Report on Form 10-K, filed on March 29, 2007).4.8
              Form of
      Warrant issued to Oxford Financial and Silicon Valley Bank on
      September 27, 2005 (incorporated by reference to Exhibit 4.16 to the
      Registrant’s Annual Report on Form 10-K, filed on March 29,
      2007).4.9
              Rights
      Agreement, dated as of May 13, 2005, between the Registrant and The
      Nevada Agency and Trust Company, as Rights Agent (incorporated by
      reference to Exhibit 99.2 to the Registrant’s Current Report on
      Form 8-K, filed on May 16, 2005).4.10
              Amendment
      to Rights Agreement, dated as of June 7, 2006, between the Registrant
      and The Nevada Agency and Trust Company, as Rights Agent
      (incorporated by reference to Exhibit 4.1 to the Registrant’s Current
      Report on Form 8-K, filed on June 12, 2006).4.11
              Form
      of Warrant issued to Comerica Bank on June 11, 2008 (incorporated by
      reference to Exhibit 4.1 to the Registrant’s Report on Form 8-K, filed on
      June 17, 2008).4.12
              Amendment
      to Rights Agreement, dated as of October 3, 2006, between the
      Registrant and The Nevada Agency and Trust Company, as Rights Agent
      (incorporated by reference to Exhibit 4.19 to the Registrant’s Annual
      Report on Form 10-K, filed on March 29, 2007).4.13
              Rights
      Agreement Amendment, dated as of July 27, 2009, to the Rights Agreement
      dated May 13, 2005 between TorreyPines and American Stock Transfer and
      Trust Company (replacing The Nevada Agency and Trust Company)
      (incorporated by reference to Exhibit 2.3 to the Registrant’s Current
      Report on Form 8-K, filed on July 28, 2009).4.14
      *
              Warrant to purchase common stock
      dated December 14, 2007 issued to Flower Ventures, LLC(incorporated by reference to Exhibit 4.1 to Raptor Pharmaceuticals Corp.’s
      Quarterly Reporton Form 10QSB/A, filed on April
      15, 2008).
                -68-4.15
      *
              Warrant
      to purchase common stock dated December 14, 2007 issued to ICON Partners,
      LP (incorporated by
      reference to Exhibit 4.2 toRaptor Pharmaceuticals Corp.’s
      Quarterly Report on Form10QSB/A, filed on
      April 15, 2008).4.16
      *
              Form
      of Warrant to purchase common stock of Raptor Pharmaceuticals Corp. (incorporated by reference to
      Exhibit 4.1 toRaptor Pharmaceuticals Corp.’s Current Report on Form8-K, filed on May 22,
      2008).4.17
      *
              Form
      of Placement Agent Warrant to purchase common stock of Raptor
      Pharmaceuticals Corp. (incorporated by reference to
      Exhibit 4.2 toRaptor Pharmaceuticals Corp.’s Current Report on Form8-K/A, filed on May 28,
      2008).4.18
      *
              Form
      of Warrant to purchase common stock of Raptor Pharmaceuticals Corp. (incorporated by reference to
      Exhibit 4.1 toRaptor Pharmaceuticals Corp.’s Current Report on Form8-K, filed on August 25,
      2009).4.19
      *
              Form
      of Placement Agent Warrant to purchase common stock of Raptor
      Pharmaceuticals Corp. (incorporated by reference to
      Exhibit 4.2 toRaptor Pharmaceuticals Corp.’s Current Report on Form8-K, filed on August 25,
      2009).4.20
              Reference
      is made to Exhibits 3.1 through 3.6.(31)
              Section
      302 Certification31.1
              Certification
      of Christopher M. Starr, Ph.D., Chief Executive Officer and
      Director31.2
              Certification
      of Kim R. Tsuchimoto, Chief Financial Officer, Secretary and
      Treasurer(32)
              Section
      906 Certification32.1
              Certification
      of Christopher M. Starr, Ph.D., Chief Executive Officer and Director, and
      of Kim R. Tsuchimoto, Chief Financial Officer, Secretary and
      Treasurer*
              The
      Raptor Pharmaceuticals Corp. warrants set forth in Exhibits 4.14 -
      4.19 have been converted into warrants of the Registrant and the
      exercise price of such warrants and number of shares of common stock
      issuable thereunder have been converted as described in Item 1.01 (under
      the section titled, “Background”) of the Registrant’s Current Report on
      Form 8-K, filed on October 5,
2009.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -69-