UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q/A


(Amendment
No. 1)


[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.





EXPLANATORY
NOTE





This Amendment No. 1 on Form 10-Q/A
(the “Amendment”) amends the Quarterly Report on Form 10-Q for  the
fiscal quarter ended November 30, 2009 of Raptor Pharmaceutical Corp. (the
“Company”), which was originally filed with the Securities and Exchange
Commission (the “SEC”) on January 14, 2009 (the “Original Quarterly
Report”).  This Amendment amends the disclosure in (i) Part I, Item 1,
“Financial Statements - Unaudited Condensed Consolidated Statements of Cash
Flows for the three month periods ended November 30, 2009 and 2008 and the
cumulative period from September 8, 2005 (inception) to November 30, 2009” of
the Original Quarterly Report to correct four typographical errors contained
therein, and (ii) Part II, Item 4, “Submissions of Matters to a Vote of Security
Holders” of the Original Quarterly Report to include updated disclosure
regarding the Company’s results of its Annual Meeting of Stockholders held on
September 28, 2009.





Except as
set forth above, this Amendment does not amend, modify or update any other
disclosures or Item presented in the Original Quarterly
Report.  Except as specifically set forth herein, this Amendment does
not reflect events occurring after the filing of the Original Quarterly Report
or amend, modify or update those disclosures or Items, including exhibits to the
Original Quarterly Report affected by subsequent events.  Accordingly,
this Amendment should be read in conjunction with our filings with the SEC
subsequent to the filing of the Original Quarterly Report, including any
amendments to those filings.  Pursuant to Rule 12b-15 under the
Securities Exchange Act of 1934, new certifications of our principal executive
officer and principal financial officer are being filed as exhibits to this
Amendment.











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
            66Item
      6
            Exhibits
            66SIGNATURES
            68




















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)
            
            $
            (24,817,855)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
            
            
            (25,466)
            
            
            (79,560)
            
            
            (132,519)Intangible
      assets
            
            
            -
            
            
            -
            
            
            (150,000)Deposits
            
            
            -
            
            
            -
            
            
            (100,207)Accounts
      payable
            
            
            488,620
            
            
            74,158
            
            
            1,102,197Accrued
      liabilities
            
            
            (287,792)
            
            
            29,080
            
            
            163,556Deferred
      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 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  to
      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)Major
      Program (stage of development)
            
            Next
              12
      Months
            
            Through
              November
      30, 2009
            
            Three
      Months Ended
              November
      30, 2009
            
            Three
      Months Ended
              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)Major
      Program (stage of development)
            
            Next
      12
              Months
            
            Through
              November
      30, 2009
            
            Three
      Months EndedNovember 30, 2009
            
            Three
      Months EndedNovember 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
ConviviaTM product
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.





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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


Item
1.             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





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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.





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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.





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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.


























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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 stockholder vote at our annual meeting, held
on September 28, 2009 (and such numbers reflect pre-split, pre-2009 Merger
numbers):




The total
number of shares voted in person or by proxy was 11,806,554 out of 15,999,058
(73.79%) shares issued and outstanding on the record date of August 27,
2009.




The
following directors were nominated to our board of directors: *




Name
      of nominee
            Number
      of shares voted FOR
            Number
      of shares WITHHELDPeter
      Davis, Ph.D.
            11,648,071
            158,483Steven
      H. Ferris, Ph.D.
            11,641,500
            165,054Evelyn
      Graham and
            11,656,966
            149,588Steven
      Ratoff
            11,661,450
            145,104





(1) 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.





Number of
shares voted FOR: 8,158,645


Number of
shares voted AGAINST: 208,772


Number of
shares ABSTAINING: 1,268


Broker
non-votes:** 3,437,869





(2) 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.





Number of
shares voted FOR: 8,137,488


Number of
shares voted AGAINST: 230,276


Number of
shares ABSTAINING: 920


Broker
non-votes:** 3,437,870














-65-





(3) A
proposal to approve an amendment to our certificate of incorporation to change
our corporate name from “TorreyPines Therapeutics, Inc.” to “Raptor
Pharmaceutical Corp.”





Number of
shares voted FOR: 8,160,136


Number of
shares voted AGAINST: 206,977


Number of
shares ABSTAINING: 1,572


Broker
non-votes:** 3,437,869





(5) 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 each of
Proposal Nos. 1, 2 and 3, above.





Number of
shares voted FOR: 8,131,716


Number of
shares voted AGAINST: 227,577


Number of
shares ABSTAINING: 9,391


Broker
non-votes:** 3,437,870





* Each of
Peter Davis, Ph.D., Steven H. Ferris, Ph.D., Evelyn Graham and Steven Ratoff,
were nominated to our board of directors at our 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.





** Broker
non-votes had the same effect as “AGAINST” votes for Proposal
Nos. 2 and 3. For Proposal Nos. 1 and 5, broker non-votes had no effect and
were not counted towards the vote total.





Item
5.     Other
Information.


None.





Item
      6.      Exhibits
                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).


-66-








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 Report on 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 to Raptor Pharmaceuticals
      Corp.’s Quarterly Report on Form 10QSB/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 to Raptor Pharmaceuticals
      Corp.’s Current Report on Form 8-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 to Raptor
      Pharmaceuticals Corp.’s Current Report on Form 8-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 to Raptor Pharmaceuticals
      Corp.’s Current Report on Form 8-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 to Raptor
      Pharmaceuticals Corp.’s Current Report on Form 8-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.


































































































-67-











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
15, 2010





By: /s/ Kim R.
Tsuchimoto


Kim R.
Tsuchimoto


Chief
Financial Officer, Secretary and Treasurer


(Principal
Financial Officer and Principal Accounting Officer)


Date:
January 15, 2010














































































































-68-








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 Report on 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 to Raptor Pharmaceuticals
      Corp.’s Quarterly Report on Form 10QSB/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 to Raptor Pharmaceuticals
      Corp.’s Current Report on Form 8-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 to Raptor
      Pharmaceuticals Corp.’s Current Report on Form 8-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 to Raptor Pharmaceuticals
      Corp.’s Current Report on Form 8-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 to Raptor
      Pharmaceuticals Corp.’s Current Report on Form 8-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.


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