Overview
You should read the following discussion in conjunction with our consolidated financial statements as of August 31, 2012, and the notes to such consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The "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 Annual Report on Form 10-K, particularly under the heading "Risk Factors."
Plan of Operation and Overview
We are an emerging biopharmaceutical company focused on developing and commercializing life-altering therapeutics that treat debilitating and often fatal diseases. Our initial focus is on developing our first product candidate, RP103, as a potential treatment for cystinosis, a rare genetic disorder. Cystinosis patients are at very high risk of experiencing life-threatening metabolic disorders, including kidney failure, severe gastrointestinal dysfunction and rickets as a result of an accumulation of the amino acid, cystine, in cells. As a result, cystinosis patients have a substantially reduced life span relative to unaffected individuals.
In July 2011, we announced that RP103 had met the sole primary endpoint in our Phase 3 clinical trial designed to evaluate RP103 as a potential treatment for cystinosis. In the first quarter of calendar 2012, we submitted an NDA to the FDA requesting approval to market RP103 as a potential treatment for cystinosis. The FDA granted Standard Review designation for RP103 and has assigned the user fee goal date (by which we anticipate a response from the FDA) of January 30, 2013. Also in the first quarter of calendar 2012, we submitted an MAA to the EMA requesting approval to market RP103 as a potential treatment for cystinosis. In addition to cystinosis, we are also testing RP103 for the potential treatment of NASH, a metabolic liver disorder, and HD, a neurodegenerative disorder. Clinical Development Programs
Our three active clinical development programs utilize the same active pharmaceutical ingredient cysteamine bitartrate. Cysteamine bitartrate was approved in 1994 as an orally available immediate-release powder in a capsule for the treatment of, and is the current standard of care for cystinosis. We are reformulating cysteamine bitartrate to potentially improve the dose administration, safety and/or efficacy compared to existing treatment and repurposing cysteamine bitartrate for potential applications in new disease indications. Our proprietary delayed-release formulation, RP103, is a capsule containing enteric coated micro-beads of cysteamine bitartrate. We believe RP103 will require less frequent dosing and could reduce gastro-intestinal and other side effects compared to immediate-release cysteamine bitartrate for cystinosis patients. In addition to cystinosis, we are also testing RP103 for the potential treatment of NASH and HD. RP104 is our enteric coated tablet formulation of cysteamine bitartrate in development. We obtained the exclusive worldwide license to delayed-release cysteamine, which is the basis for our proprietary formulations of cysteamine, through the 2007 merger of our clinical subsidiary and Encode, formerly a privately-held product development company. Our other clinical-stage product candidate is Convivia, our proprietary oral formulation of 4-methylpyrazole, for the potential management of acetaldehyde toxicity due to alcohol consumption by individuals with aldehyde dehydrogenase, or ALDH2 deficiency, an inherited metabolic disorder. Preclinical Product Candidates
Our preclinical platforms consist of targeted therapeutics for the potential treatment of multiple indications, including liver diseases, neurodegenerative diseases and breast cancer. We are seeking development partners for these programs. These preclinical programs include the following:
· Our receptor-associated protein, or RAP, platform consists of: HepTide for the potential treatment of primary liver cancer and other liver diseases; and NeuroTrans to potentially deliver therapeutics across the blood-brain barrier for treatment of a variety of neurological diseases; and

· Our mesoderm development protein, or Mesd, platform consists of WntTide for the potential treatment of breast cancer.

Future Activities
Over the next fiscal year, we plan to conduct research and development and general and administrative activities including: pre-commercial launch preparation of RP103 in the U.S. and EU, (including preparing commercial materials and coordinating drug supply)

and, if approved, conducting a commercial launch of RP103 in the U.S. and EU; supporting our ongoing extension study of RP103 in cystinosis until patients are converted onto commercial drug; conducting other supporting clinical studies of RP103 in cystinosis; supplying clinical material for our ongoing clinical trial of RP103 in HD; funding the collaboration and supplying clinical material in our ongoing Phase 2b clinical trial of RP103 in NASH; continuing business development of our preclinical product candidates; conducting research and development activities for in-licensed and newly discovered preclinical assets; supporting potential clinical trials of RP103 in malaria, Rett Syndrome, fibrosis and Parkinson's Disease (subject to potential external funding); and supporting associated facilities and administrative functions. We plan to seek additional business development partners for our Convivia product candidate in Asia. We may also develop new preclinical, clinical and or commercial opportunities, including proprietary targets discovered in-house and in-licensed and acquired technologies.
Application of Critical Accounting Policies

Our 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.

Many of the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires our 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 our consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Functional Currency

Our consolidated functional currency is the U.S. dollar. Raptor Pharmaceuticals Europe B.V. ("BV") and RPTP European Holdings C.V. ("CV"), our European subsidiary and Cayman-based subsidiary, respectively, use the European Euro as their functional currency. At each quarter end, BV's and the CV's balance sheets are translated into U.S. dollars based upon the quarter-end exchange rate, while their statements of comprehensive loss are translated into U.S. dollars based upon an average of the Euro's value between the beginning and end date of the reporting period. BV's and CV's equity are adjusted for any translation gain or loss.

The carrying amounts of certain of our financial instruments including cash and cash equivalents, restricted cash, prepaid expenses, accounts payable, accrued liabilities and capital lease liability approximate fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in our consolidated financial statements. The warrant liability is carried at fair value which is determined using the Black-Scholes option valuation model at the end of each reporting period.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. We maintain 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. We have not experienced any losses on these investments. Restricted cash represents compensating balances required by our U.S. and European banks as collateral for credit cards.

Short-term Investments

We invest in short-term investments in high credit-quality funds in order to obtain higher yields on our idle cash. Such investments are not insured by the Federal Deposit Insurance Corporation. We completed an evaluation of our investments and determined that we did not have any other-than-temporary impairments as of August 31, 2012. The investments are placed in financial institutions with strong credit ratings and management expects full recovery of the carrying amounts.

Prepaid expenses and other

Prepaid expenses consists primarily of advance payments to vendors that are due within one year. Other consists primarily of a receivable of $0.5 million resulting from a timing difference in the receipt of cash proceeds from the sale of common stock under our At-The-Market Sales Agreement as discussed in Note 9 in our consolidated financial statements attached as an exhibit to this Annual Report on Form 10-K.

Deferred Offering Costs

Deferred offering costs represent expenses incurred to raise equity capital related to financing transactions which have not yet been completed as of the balance sheet dates.

Intangible Assets
Intangible assets include the intellectual property and other rights relating to DR Cysteamine (currently developed as RP103 and RP104) and to an out-license acquired in the 2009 Merger. The intangible assets related to RP103/RP104 are amortized using the straight-line method over the estimated useful life of 20 years, which is the life of the intellectual property patents. The 20-year estimated useful life is also based upon the typical development, approval, marketing and life cycle management timelines of pharmaceutical drug products. The intangible assets related to the out-license will be amortized using the straight-line method over the estimated useful life of 16 years, which is the life of the intellectual property patents.

Goodwill

Goodwill represents the excess of the value of the purchase consideration over the identifiable assets acquired in the 2009 Merger. Goodwill is reviewed annually, or when an indication of impairment exists, to determine if any impairment analysis and resulting write-down in valuation is necessary.

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.

As of August 31, 2012, we determined that the capitalized acquired in-process research and development cost of $0.9 million, representing the tezampanel and NGX 426 program acquired in the 2009 Merger, was impaired due to our decision to discontinue development for thrombosis due to regulatory hurdles that would require significant expenditures which we chose not to prioritize for funding.
As such, we expensed $0.9 million as in-process research and development as part of research and development expense on our consolidated statements of comprehensive loss for the year ended August 31, 2012.

Common Stock Warrant Liabilities

The warrants issued by us in the 2010 private placement contain a cash-out provision which may be triggered upon request by the warrant holders if we are acquired or upon the occurrence of certain other fundamental transactions involving us. This provision requires these warrants to be classified as liabilities and to be marked to market at each period end commencing on August 31, 2010. The warrants issued by us in our December 2009 equity financing contain a conditional obligation that may require us to transfer assets to repurchase the warrants upon the occurrence of potential future events. Under the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 480, Distinguishing Liabilities from Equity, a financial instrument that may require the issuer to settle the obligation by transferring assets is classified as a liability. Therefore, we have classified the warrants as liabilities and will mark them to fair value at each period end. The common stock warrants are re-measured at the end of every reporting period with the change in value reported in our consolidated statements of operations. Warrants which are recorded as liabilities that are exercised are re-measured and marked to market the day prior to exercise. Upon exercise of such warrants, the fair value of such warrants is reclassified to equity.

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.
Our effective tax rate is 0% for income tax for the year ended August 31, 2012. Based on the weight of available evidence, including cumulative losses since inception and expected future losses, we have 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 our net deferred tax assets. Utilization of our net operating loss ("NOL") carryovers may be subject to substantial annual limitation due to the ownership change rules under the Internal Revenue Code and similar state income tax law provisions including those related to the suspension and limitation of NOL carryovers for certain tax years. Such an annual limitation could result in the expiration of our NOL carryovers before utilization.
On September 1, 2009, we adopted the provisions of ASC No. 740-10, Accounting for Uncertainty in Income Taxes ("ASC 740-10"). ASC 740-10 requires entities following GAAP to identify uncertain tax positions and disclose any potential tax liability on their financial statements using a two-step process, which includes recognition and measurement.
Our continuing practice is to recognize interest and/or penalties related to income tax matters as a component of income tax expense. As of August 31, 2012, there was no accrued interest and penalties related to uncertain tax positions. We file U.S. Federal, California, Georgia and North Carolina state income tax returns and Dutch income tax returns. We are currently not subject to any income tax examinations. Due to our NOLs, generally all tax years remain open.

Research and Development

We are a development stage biotechnology company. Research and development costs are charged to expense as incurred. Research and development expenses include medical, clinical, regulatory and scientists' salaries and benefits, commercial manufacturing prior to drug approval, lab collaborations, preclinical studies, clinical trials, clinical trial materials, regulatory and clinical consultants, lab supplies, lab services, lab equipment maintenance and small equipment purchased to support the research laboratory, amortization of intangible assets and allocated executive, human resources and facilities expenses. Research and development expenses are offset by contra-expenses which are reimbursements of research and development expenses received either from research collaborators or from government grants or tax rebates.

In-Process Research and Development

Prior to September 1, 2009, we recorded in-process research and development expense for a product candidate acquisition where there is not more than one potential product or usage for the assets being acquired. Upon the adoption of the revised guidance on business combinations, effective September 1, 2009, the fair value of acquired in-process research and development is capitalized and tested for impairment at least annually. Upon completion of the research and development activities, the intangible asset is amortized into earnings over the related product's useful life. In-process research and development that is amortized or expensed is recorded as part of research and development expenses on our statements of operations. We review each product candidate acquisition to determine the existence of in-process research and development.

Comprehensive Loss

Components of comprehensive loss are reported in our consolidated statements of operations in the period in which they are recognized. The components of comprehensive loss include net loss and foreign currency translation adjustments.

Stock-Based Compensation

In February 2010, our board of directors approved, and in March 2010 our stockholders approved, our 2010 Equity Incentive Plan, or the 2010 Plan, to grant up to an aggregate of 3,000,000 stock options or restricted stock or restricted stock units over the ten year life of the 2010 Plan. Our board of directors has determined not to make any new grants under any of our former plans, but rather under the 2010 Plan. The 2010 Plan's term is ten years and allows for the granting of options to employees, directors and consultants. On April 7, 2011, our stockholders passed amendments to the 2010 Plan which allow for an increase of the grant pool based upon 5% of our common stock outstanding as of April 7, 2011, August 31, 2011 and August 31, 2012 up to an aggregate maximum increase of 6,000,000 shares. The April 7, 2011, August 31, 2011 and August 31, 2012 increases added 1,629,516, 1,778,459 and 2,528,407 shares, respectively, available for grant under the 2010 Plan. The amendments also allow for 50% accelerated vesting of unvested stock options upon a change of control as defined in the 2010 Plan, as amended. In September 2011, our board of directors approved an amended and restated form of award agreement to the 2010 Plan, which will be used for awards granted on or after September 22, 2011. The amended and restated award agreement, subject to the terms of any applicable employment agreement, extends the termination date of the awards granted under the 2010 Plan that are vested as of such termination date due to (a) an employee's retirement or a non-employee director's voluntary cessation of service at age 62 or older which employee or non-employee director has at least five (5) years of continuous service with us prior to such retirement or cessation, (b) the termination of a non-employee director's board membership for reasons other than for cause or voluntary cessation of service and (c) an employee's or a non-employee director's death (during his or her continuous service with us or within 90 days' of such continuous service with us) or permanent disability.
In May 2006, RPC's stockholders approved the 2006 Equity Compensation Plan, as amended, referred to herein as the 2006 Plan. The 2006 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 RPC granted under the 2006 Plan. Such assumed options are subject to the terms of the 2006 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 2006 Plan. Prior to the 2009 Merger, and subject to the 2009 Merger becoming effective, our board of directors adopted the 2006 Plan such that the 2006 Plan became an equity incentive plan of ours after the 2009 Merger. Typical option grants under the 2010 and 2006 Plans are for ten years with exercise prices at the 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 ASC Topic 718, Accounting for Compensation Arrangements , or ASC Topic 718 (previously listed as Statement of Financial Accounting Standards No.
123 (revised 2004), Share-Based Payment , or SFAS 123(R)), 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.

In March 2005, the FASB issued ASC Topic 718 (previously listed as Staff Accounting Bulletin No. 107), which offers guidance for what was previously referred to as SFAS 123(R). ASC Topic 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 Topic 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 Topic 718 include valuation models, expected volatility and expected term.

For the year ended August 31, 2012, stock-based compensation expense was based on the Black-Scholes option-pricing model assuming the following: risk-free interest rate of 0.68% to 1.2%; 5-6 year expected life; 121 to 125% volatility; 2.5% 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 and five years (average); the expected life of five-to-six years 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 we are at a more mature stage of development; the volatility was based on the actual volatility of our common stock price as quoted on NASDAQ since the closing of our 2009 Merger on September 30, 2009; the turnover rate was based on our assessment of our historical employee turnover; 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 Topic 718, the compensation expense recorded in future periods may differ significantly from what was recorded in the current period. See Note 7 of our consolidated financial statements for a 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 (previously listed as Emerging Issues Task Force, or 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.

Results of Operations

Years ended August 31, 2012 and 2011

General and Administrative Expenses (in thousands)

General and administrative expenses include finance, executive and sales and marketing compensation and benefits, pre-commercial expenses, such as reimbursement and marketing studies, corporate costs, such as legal and auditing fees, business development expenses, travel, board of director fees and expenses, investor relations expenses, intellectual property costs associated with filed (but not issued) patents, administrative consulting and allocated human resources and facilities costs. General and administrative expenses for the year ended August 31, 2012 increased by approximately $8,545 compared to the prior fiscal year. The increase was primarily due to:

                                                                            Increase
Reason for Increase (Decrease)                                             (Decrease)
Expenses not in FY2011:
Commercial operations requirements RP103 for the potential treatment
of cystinosis:
Pre-commercial consulting services                                       $        1,996
Tax study and advisory fees related to EU headquarters                              866
Salary and bonuses for commercial operations personnel                              516
Salary, benefit and bonus increases and new finance and human
resources personnel                                                               1,182
Stock-based compensation expense, employees and directors (non-cash)              2,062
Legal fees due to in-licensing of intellectual property                             575
Investor relations costs including proxy mailing and solicitation,
press releases, webcasting, XBRL filing costs                                       492
Other, net                                                                          856
General and Administrative increase year ended August 31, 2012 vs.
August 31, 2011                                                          $        8,545

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