| DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying condensed consolidated financial statements reflect the financial position and results of operations of Raptor Pharmaceutical Corp. (the “Company” or “Raptor”) and have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the periods presented. The condensed consolidated balance sheet as of December has been derived from the Company’s audited financial statements as of such date but does not include all disclosures required by GAAP. This Form -Q should be read in conjunction with the audited financial statements and accompanying notes in the Company’s Annual Report on Form -K for the year ended December R aptor is a biopharmaceutical company focused on developing and commercializing transformative treatments for people affected by rare and debilitating diseases. The Company’s first product, PROCYSBI® (cysteamine bitartrate) delayed-release capsules (“PROCYSBI”), received marketing approval from the U.S. Food and Drug Administration (“FDA”) on April 30, 2013 for the management of nephropathic cystinosis in adults and children six years and older. On August 14, 2015 the Company received FDA approval for the expanded use of PROCYSBI to treat children two to six years of age with nephropathic cystinosis. In Europe, PROCYSBI® gastro-resistant hard capsules of cysteamine (as mercaptamine bitartrate), received marketing authorization on September 6, 2013 from the European Commission (“EC”), for marketing in the European Union (“EU”) as an orphan medicinal product for the management of proven nephropathic cystinosis. PROCYSBI received seven years of market exclusivity, through 2020, as an orphan drug in the United States and ten years of market exclusivity, through 2023, as an orphan drug in Europe. The Company commenced commercial sales of PROCYSBI in the United States in June 2013, and in Europe in April 2014. For at least the near term, the Company’s ability to generate revenue is dependent upon sales of PROCYSBI in the United States for the management of nephropathic cystinosis in adults and children two years and older and in the EU for the management of proven nephropathic cystinosis. Raptor’s development pipeline includes its proprietary delayed-release form of cysteamine, or RP the investigational form of PROCYSBI, and its proprietary oral -methylpyrazole, or Convivia ® . Raptor currently has product candidates in clinical development designed to potentially treat Huntington’s disease (“HD”) and Leigh syndrome and other mitochondrial disorders and aldehyde dehydrogenase deficiency (“ALDH ”). Raptor’s preclinical programs are based upon bioengineered novel drug candidates that are designed to address current and potential other cysteamine indications, as well as target cancer and other diseases. The Company is subject to a number of risks, including: the level of commercial sales of PROCYSBI in the United States and Europe; the ability to successfully launch PROCYSBI in other international markets; uncertainty as to whether the Company’s regulatory and research and development efforts will result in expanded labeling for PROCYSBI and additional commercialization for RP in various indications or additional commercial products; competition from other organizations; reliance on other entities for manufacturing of commercial and clinical development drug; reliance on licensing and successfully developing the proprietary technology of others; uncertain patent protection; and the need to raise capital through equity and/or debt financings. Funding may not be available when needed on terms that are acceptable to the Company, if at all. If the Company exhausts its cash reserves and is unable to obtain adequate financing, it may be required to curtail planned operating expenditures, including its development programs. Basis of Presentation The Company’s consolidated financial statements include the accounts of the Company’s direct and indirect wholly owned subsidiaries: Raptor Pharmaceuticals Inc., formerly known as Raptor Therapeutics Inc., which merged with Raptor Discoveries Inc. in December prior to changing its name, and Raptor European Products, LLC, each of which was incorporated in Delaware on August and February respectively, and Raptor Pharmaceuticals Europe B.V. (“BV”), Raptor Pharmaceuticals France SAS (“SAS”), Raptor Pharmaceuticals Germany GmbH (“GMBH”) and RPTP European Holdings C.V. (“CV”), domiciled in the Netherlands on December in France on October in Germany on October and in the Cayman Islands on February respectively. All inter-company accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the Company’s 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. Functional Currency The Company’s consolidated functional currency is the U.S. dollar. BV, SAS, and GMBH, the Company’s Dutch subsidiary, French subsidiary, and German subsidiary, respectively, use the European Euro as their functional currency. The CV subsidiary, a Cayman-based subsidiary, uses the U.S dollar as its functional currency. At each quarter end, each foreign subsidiary’s balance sheets are translated into U.S. dollars based upon the quarter-end exchange rate, while their statements of operations and comprehensive loss are translated into U.S. dollars based upon an average exchange rate during the period. Segment Information The Company has determined that it operates in only segment, as it only reports profit and loss information on an aggregate basis to its chief operating decision maker, the chief executive officer. The Company’s long-lived assets maintained outside the U.S. are not material. Fair Value of Financial Instruments The carrying amounts of certain of the Company’s financial instruments including cash equivalents, restricted cash, short-term investments, accounts receivable, accounts payable, accrued liabilities, note payable and capital lease liability approximate fair value due either to length of maturity or interest rates that approximate prevailing market rates. The Company previously recorded a common stock warrant liability which was carried at fair value, determined using the Black-Scholes option valuation model at the end of each reporting period. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of months or less, when purchased, to be cash equivalents. The Company maintains cash and cash equivalents, which consist principally of money market funds, with high credit quality financial institutions. Such amounts exceed Federal Deposit Insurance Corporation insurance limits. As of September the Company had in cash and cash equivalents, of which was held by its foreign subsidiaries. Restricted Cash Restricted cash represents certificates of deposit and compensating balances required by the Company’s U.S. and European banks as collateral for credit cards and for access to a value-added tax deferral program. Short-term Investments Short-term investments represent investments in high quality commercial paper with original maturities of greater than 90 days but less than six months. From time to time, the Company invests in short-term, high credit-quality funds in order to obtain higher yields on its cash reserves. Such investments are not insured by the Federal Deposit Insurance Corporation. The Company had no short-term investments at September 30, 2015. Revenue Recognition and Accounts Receivable The Company recognizes revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company determines that persuasive evidence of an arrangement exists based on written contracts that define the terms of its revenue arrangements. Pursuant to the contract terms, the Company determines when title to products and associated risk of loss has passed on to the customer. The Company assesses whether the Company’s product and/or revenue fees are fixed or determinable based on the payment terms associated with the corresponding transaction and whether the sales price and/or fees are subject to refund or adjustment. The Company assesses collectability based primarily on the customer’s payment history and creditworthiness, and records a reserve for product returns based upon timing and history of similar product sales and returns in the pharmaceutical industry. PROCYSBI is currently distributed in the U.S. by a specialty pharmacy distributor, the Accredo Health Group, Inc. (“Accredo”) which is currently the Company’s only U.S. customer and which subsequently ships directly to patients. The Company’s distributor in the EU and other territories outside the U.S. is the Almac Group, Ltd., which ships directly to pharmacies after a prescription for PROCYSBI has been received. PROCYSBI is not available in U.S. retail pharmacies. Authorization of coverage by patients’ commercial insurance plans, Raptor’s patient assistance program (“PAP”) or government payors is a prerequisite to the shipment of PROCYSBI to U.S. patients. Prior to the third quarter of 2014, revenue from the sale of PROCYSBI in the U.S. was recognized based on the amount of product sold through to the patients. Beginning July 2014, we were able to reasonably estimate and determine sales allowances in the U.S.; therefore we began recognizing PROCYSBI revenue in the U.S. at the point of sale to the specialty pharmacy, which resulted in a one-time non-recurring recognition of an additional $4.4 million in net revenues during the three months ended September 30, 2014. Revenue is currently recognized in the EU once confirmed orders from pharmacies have been shipped and invoiced for payment by the distributor on the Company’s behalf. The Company records revenue net of expected discounts, distributor fees, and rebates, including government rebates such as Medicare and Medicaid in the U.S. Allowances are recorded as a reduction of revenue at the time product sales are recognized. Allowances for government rebates and discounts are established based on the actual payor and payor mix information, which is known in the U.S. at the time of shipment to the distributor and in Europe at the time of shipment to pharmacies, and the government-mandated discount rates applicable to government-funded programs. The allowances are adjusted to reflect known changes in the factors that may impact such allowances in the quarter the changes are known. Trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts and chargebacks. Estimates for chargebacks and prompt-payment discounts are based on contractual terms and the Company’s expectations regarding utilization rates. Inventories and Cost of Sales Inventories are stated at the lower of cost or market price, with cost determined on a -in, -out basis. Inventories are reviewed periodically to identify slow-moving inventory based on sales activity, both projected and historical, as well as product shelf-life. Prior to the approval of PROCYSBI by the FDA on April and in Europe, prior to the approval by the EC on September the Company recorded the purchase of raw materials and the manufacturing costs relating to PROCYSBI as research and development expense. Subsequent to FDA and EC approval, the Company began capitalizing these costs including manufacturing overhead of inventory intended for sale as commercial inventory. Products that have been approved by the FDA or other regulatory authorities are also used in clinical programs, to assess the safety and efficacy of the products for usage in diseases or patients that have not been approved by the FDA or other regulatory authorities. The form of PROCYSBI utilized for both commercial and clinical programs is identical and, as a result, the inventory has an “alternative future use” as defined in authoritative accounting guidance. Raw materials and purchased drug product associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and/or no longer can be used for commercial purposes and, therefore, does not have an “alternative future use”. Upon launching PROCYSBI in June in the United States and in April in the EU, the Company began recognizing cost of sales. Cost of sales includes the cost of inventory sold or reserved; manufacturing, manufacturing overhead and supply chain costs; inventory variance amortization; product shipping and handling costs; and amortization of licensing approval milestone payments and licensing royalties payable to the University of California, San Diego (“UCSD”). Fixed Assets Fixed assets, which mainly consist of leasehold improvements, office furniture, lab equipment and computer hardware and software, 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 year are capitalized, while repairs and maintenance are charged to expense as incurred. Goodwill and Intangible Assets Intangible assets primarily include the intellectual property and other rights relating to DR Cysteamine (currently utilized in PROCSYBI and in the development of RP associated with a licensing agreement with UCSD, which was acquired by the Company in a merger. The intangible assets related to RP are amortized using the straight-line method over the estimated useful life of years, which is the life of the intellectual property patents. The -year estimated useful life is also based upon the typical development, approval, marketing and life cycle management timelines of pharmaceutical drug products. Goodwill represents the excess of the purchase price over the fair value of tangible and identified intangible net assets of businesses acquired. Goodwill is not amortized, but is evaluated for impairment on an annual basis or more often when impairment indicators are present. The Company has reporting unit. Therefore, the Company’s consolidated net assets, including existing goodwill and other intangible assets, are considered to be the carrying value of the reporting unit. If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. If the estimated fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and no further analysis is required. The Company makes judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist. Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. Impairment, if any, is measured as the amount by which the carrying value exceeds the fair value of the impaired asset. Common Stock Warrant Liabilities The Company previously issued common stock warrants that contained conditional obligations that may have required the Company to transfer cash to settle the warrants upon the occurrence of certain fundamental transactions. Therefore, the Company classified such warrants as liabilities. At each reporting period, the Company re-measured the common stock warrant liability at the end of every reporting period with the change in value reported in the Company’s consolidated statements of operations and comprehensive loss. At the exercise date, the fair values of these warrants were re-measured and reclassified to equity. As of September all common stock warrants had been exercised or expired. Note Payable Note payable consists of a loan agreement with HealthCare Royalty Partners II, L.P. (“HC Royalty”), as lender, which was amended effective July 1, 2014. The amendment qualified as a modification of debt in accordance with ASC 470-50, Debt – Modifications and Extinguishments, as the Company determined the amendment did not result in substantially different terms. The amended loan requires quarterly interest payments at an annual fixed interest rate on outstanding principal and includes a synthetic royalty component based on net product revenue, including PROCYSBI, in a calendar year. The amended loan is a senior secured obligation of the Company. Note payable is carried at its unpaid principal balance. The fixed and royalty interest under both agreements are recognized as interest expense as incurred. See Note 7 for additional information on note payable. Convertible Notes Convertible notes include unsecured convertible senior notes and are carried at their unpaid principal balance. Interest on the notes is payable quarterly and the notes mature on August If converted by a holder, upon conversion, the holder of the notes would receive shares of the Company’s common stock. See Note 8 for additional information on note payable. Debt Issuance Costs Debt issuance costs are expenses associated with the loan agreements with HC Royalty and the issuance of convertible notes. Debt issuance costs which were capitalized are being amortized over the life of the respective debt to interest expense using the interest method. Debt issuance costs are a component of Other Assets on the Company’s consolidated balance sheets. 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 loss per share is calculated by dividing net loss 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: Nine Months Ended September 30, 2015 2014 Options to purchase common stock 8,915,688 9,287,302 Convertible debt 3,428,571 3,428,571 Restricted stock unit awards outstanding 356,481 - Warrants to purchase common stock - 334,764 Total Potentially Dilutive Securities 12,700,740 13,050,637 Comprehensive Loss The components of comprehensive loss include net loss and foreign currency translation adjustments. Stock-Based Compensation Compensation costs related to the Company’s stock incentive plans are measured at the grant date based on the fair value of the equity instruments awarded and are 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. Compensation expense for stock-based compensation awards is reduced by an estimate for forfeitures. Incentive Plans In February the Company’s shareholders approved the Raptor Pharmaceutical Corp. Stock Incentive Plan (“ Stock Incentive Plan”) for executive officers, employees, and non-employee directors. The Stock Incentive Plan, as amended, provides for the grant of stock options, restricted stock units (“RSUs”), and other types of awards to eligible participants. Long-term incentive awards granted under the Stock Incentive Plan generally vest over a -year period. Non-employee directors are also provided annual awards under the Stock Incentive Plan that generally vest over a year period. The cost of the awards is amortized over the vesting period on a straight-line basis. In November the Company’s Board of Directors approved the Employment Commencement Stock Incentive Plan (“ Commencement Plan”) under Rule (c) of the Nasdaq Global Select Market for equity grants to induce new employees to enter into employment with the Company. On May at the Company’s Annual Meeting of Stockholders, the Company’s stockholders approved amendments to the Company’s Stock Incentive Plan (“ Plan Amendment”). These amendments were previously approved by the Company’s Board of Directors in February Among other things, the Plan Amendment increased the share reserve available for issuance under the Stock Incentive Plan by shares to an aggregate of shares plus any shares which are subject to awards under the Commencement Plan which are forfeited or lapse unexercised and which are not issued under the Commencement Plan, all of which may be used for any form of award under the Stock Incentive Plan. Following the approval of the Plan Amendment by the Company’s stockholders, no new equity grants will be made under the Commencement Plan. Employee Stock Purchase Plan In July the Company’s stockholders approved the Raptor Pharmaceutical Corp. Employee Stock Purchase Plan (“ESPP”). Up to shares may be issued pursuant to the ESPP. The purpose of the ESPP is to give the Company’s employees an opportunity to acquire an equity interest in the Company through the purchase of shares of common stock at a discount. The ESPP allows eligible employees to purchase shares of the Company’s common stock at of its fair value, subject to certain limits. Fair value as defined under the ESPP is the lesser of the closing market price of the common stock on the day of the offering period or the last day of the offering period, which is a -month period beginning on each May and November Research and Development Costs Research and development costs are charged to expense as incurred. Research and development expenses primarily include salaries and benefits for medical, clinical, regulatory, quality, pharmacovigilance, preclinical, and research personnel, costs related to research activities, preclinical and nonclinical studies, clinical trials, and drug manufacturing expenses, including certain commercial drug manufacturing expenses prior to obtaining marketing approval. 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. Based on the weight of available evidence, including cumulative losses since inception and expected future losses, the Company has determined that it is more likely than not that the deferred tax asset amount will not be realized and therefore a full valuation allowance has been provided on the Company’s net deferred tax assets. The Company identifies uncertain tax positions and discloses any potential tax liability on its financial statements. The Company recognizes interest and/or penalties related to income tax matters as a component of income tax expense. As of September there were no accrued uncertain tax positions or interest and penalties related to uncertain tax positions. The Company files U.S. federal, California state, and various other state and foreign country income tax returns. The Company is currently not subject to any income tax examinations. Due to the Company’s net operating losses (“NOLs”), generally all tax years remain open. Reclassifications Certain amounts previously reported under specific financial statement captions have been reclassified to be consistent with the current period presentation. Recent Accounting Pronouncements In May the FASB issued Accounting Standards Update (“ASU”) - Revenue from Contracts with Customers , which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, the Company will: identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation. In August the FASB issued ASU - which defers the effective date of ASU - by year for all entities and permits early adoption on a limited basis. ASU - is now effective for annual reporting periods (including interim reporting periods within those periods) beginning after December Early adoption is permitted as of annual reporting periods beginning after December including interim reporting periods within those annual periods. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements. In June the FASB issued ASU - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period . The ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. A reporting entity should apply existing guidance in Topic as it relates to awards with performance conditions that affect vesting to account for such awards. In July the FASB voted to defer the effective date of this ASU for year, revising the effective date for interim and annual periods beginning after December Early adoption is permitted. The Company does not anticipate the adoption of this ASU will have a material impact on its consolidated financial statements. In August the FASB issued ASU - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The ASU requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within year of the date of issuance of the entity’s financial statements (or within year after the date on which the financial statements are available to be issued, when applicable). Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.” This ASU is effective for annual periods ending after December and interim periods thereafter; early adoption is permitted. In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs Interest - Imputation of Interest, In July the FASB issued ASU - Simplifying the Measurement of Inventory , which requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU 2015 - 11 is effective prospectively for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of this amendment to have a material effect on its financial condition and results of operations. |
