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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 2)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

or

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________to__________

Commission File Number: 000-25571

Raptor Pharmaceutical Corp.

(Exact name of registrant as specified in its charter)

(Address of principal executive offices) (Zip Code)

(415) 408-6200

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    þ      No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    þ      No    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨      No    þ

There were 62,616,859 shares of the registrant's common stock, par value $0.001, outstanding as of April 30, 2014.

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RAPTOR PHARMACEUTICAL CORP.

 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

Table of Contents

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS. Raptor Pharmaceutical Corp.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except shares and per share data, or unless otherwise specified)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Raptor Pharmaceutical Corp.

(A Development Stage Company)

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except per share data, or unless otherwise specified)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Raptor Pharmaceutical Corp.

(A Development Stage Company)

Condensed Consolidated Statement of Stockholders' Equity

For the Quarter Ended March 31, 2013

(Unaudited)

(In thousands, except per share data, or unless otherwise specified)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Raptor Pharmaceutical Corp.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands, except per share data, or unless otherwise specified)

 

		For the quarter ended								For the cumulative period from September 8, 2005 (inception) to
		March 31, 2013				February 29, 2012				March 31, 2013
Cash flows from operating activities:
Net loss		$	(15,927	)		$	(13,992	)		$	(151,865	)
Adjustments to reconcile net loss to net cash used in operating activities:
Employee stock-based compensation expense			1,748				1,104				11,816
Consultant stock-based compensation expense			4				0				768
Fair value adjustment of common stock warrants			(1,060	)			7,814				25,793
Amortization of intangible assets			36				37				782
Depreciation of fixed assets			36				9				644
Gain (loss) on short-term investments			107				(67	)			171
Write-off of intangible assets and other intellectual property			0				0				1,249
Amortization of debt issuance costs			54				0				54
Changes in assets and liabilities:
Prepaid expenses and other			193				(2,009	)			(1,177	)
Intangible assets			0				0				(150	)
Deposits			(194	)			0				(220	)
Accounts payable			(1,883	)			(1,178	)			2,716
Accrued liabilities			2,414				717				3,884
Deferred rent			(6	)			4				0
Net cash used in operating activities			(14,478	)			(7,561	)			(105,535	)
Cash flows from investing activities:
Purchase of fixed assets			(112	)			(162	)			(1,092	)
Cash acquired in 2009 Merger			0				0				581
Change in restricted cash			(50	)			(50	)			(213	)
Purchase of short-term investments			(134	)			(156	)			(52,294	)
Sale of short-term investments			0				0				30,000
Net cash used in investing activities			(296	)			(368	)			(23,018	)
Cash flows from financing activities:
Proceeds from the sale of common stock			0				0				85,941
Proceeds from the sale of common stock under an equity line			0				(2	)			4,201
Proceeds from the sale of common stock under an ATM agreement			12,949				0				26,318
Proceeds from the exercise of common stock warrants			1,845				2,820				24,598
Proceeds from the exercise of common stock options			7				67				734
Note payable			0				0				25,000
Debt issuance costs			(3	)			0				(1,962	)
Offering costs			40				0				(70	)
Proceeds from the sale of common stock to initial investors			0				0				310
Payments on capital lease			(1	)			(3	)			(26	)
Net cash provided by financing activities			14,837				2,884				165,044
Effect of exchange rates on cash and cash equivalents			(88	)			2				(203	)
Net increase (decrease) in cash and cash equivalents			(25	)			(5,043	)			36,288
Cash and cash equivalents, beginning of period			36,313				24,732				0
Cash and cash equivalents, end of period		$	36,288			$	19,689			$	36,288
Supplemental cash flow information:
Interest paid		$	672			$	0			$	772
Supplemental disclosure of non-cash financing activities:
Warrants issued in connection with financing		$	0			$	0			$	16,310
Initial fair value of warrants issued to placement agents in connection with financings		$	0			$	0			$	209
Common stock and warrants issued in connection with reverse merger		$	0			$	0			$	4,417
Common stock issued as fee for equity line		$	0			$	0			$	828
Fair value of warrant liability reclassified to equity upon exercise		$	2,636			$	6,613			$	22,969
Acquisition of equipment in exchange for capital lease		$	0			$	0			$	48
Notes receivable issued in exchange for common stock		$	0			$	0			$	110
Common stock issued for a finder's fee		$	0			$	0			$	102
Common stock issued in asset purchase		$	0			$	0			$	2,899

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Raptor Pharmaceutical Corp. (the “Company” or “Raptor”) is a biopharmaceutical company focused on developing and commercializing life-altering therapeutics that treat rare, debilitating and often fatal diseases. Raptor’s first product, PROCYSBI TM  (cysteamine bitartrate) delayed-release capsules received marketing approval from the U.S. Food and Drug Administration (“FDA”) on April 30, 2013 for the management of nephropathic cystinosis (“cystinosis”) in adults and children six years and older. Cystinosis is a rare metabolic lysosomal storage disease. The Company plans to launch PROCYSBI TM in the U.S. by the end of the second quarter of 2013. The Company anticipates receiving a determination from the European Medicines Agency (“EMA”) regarding Raptor’s application for marketing approval of PROCYSBI TM in the EU in the second half of 2013. Raptor’s pipeline also includes RP103 in Phase 2/3 development for Huntington's disease and RP103 in Phase 2b development for nonalcoholic fatty liver disease (“NAFLD”) in children. Raptor's preclinical programs are based upon novel drug candidates that are designed to treat primary liver cancer and various other diseases.

The Company is subject to a number of risks, including: the success of the U.S. launch of PROCYSBITM; the approval of PROCYSBI TM  in the EU; the need to raise capital through equity and/or debt financings; the uncertainty of whether the Company's research and development efforts will result in successful commercial products; competition from larger organizations; reliance on licensing the proprietary technology of others; dependence on key personnel; uncertain patent protection; and dependence on corporate partners and collaborators.  Funding may not be available when needed if at all or on terms acceptable to us.  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.

Change in Fiscal Year End

In December 2012, Raptor's board of directors approved a change in the Company's fiscal year end from August 31 to December 31, effective on December 31, 2012. The accompanying condensed consolidated financial statements cover the period from January 1, 2013 through March 31, 2013, representing the first quarter of Raptor's newly adopted fiscal year. The prior fiscal year quarter ended February 29, 2012 is reported on the basis of Raptor’s previous fiscal year cycle. As a result of the change in Raptor’s fiscal year end, the quarterly periods of Raptor’s newly adopted fiscal year do not coincide with the historical quarterly periods that Raptor had previously reported.

Basis of Presentation

The accompanying condensed consolidated financial statements reflect the results of operations of Raptor and have been prepared in accordance with the accounting principles generally accepted in the U.S. ("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 31, 2012 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 10-Q/A should be read in conjunction with the audited financial statements and accompanying notes in the Company's Transition Report on Form 10-KT/A for the four-month period ended December 31, 2012 as amended.

The Company's condensed 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 2012 prior to changing its name and Raptor European Products, LLC, such subsidiaries incorporated in Delaware on August 1, 2007, and February 14, 2012, respectively, and Raptor Pharmaceuticals Europe B.V. (domiciled in the Netherlands and formed on December 15, 2009), Raptor Pharmaceuticals France SAS (formed in France on October 18, 2012) and RPTP European Holdings C.V. (located in the Grand Caymans and formed on February 16, 2012). All intercompany accounts have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Comprehensive Loss

The components of comprehensive loss include net loss and foreign currency translation adjustments.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. The Company maintains cash and cash equivalents, which consist principally of money market funds with high credit quality financial institutions. Such amounts exceed Federal Deposit Insurance Corporation insurance limits. Restricted cash represents compensating balances required by the Company's U.S. and European banks as collateral for credit cards.

Short-term Investments

The Company invests in short-term investments in high credit-quality funds in order to obtain higher yields on its cash available for investment. Short-term investments as of March 31, 2013 and December 31, 2012 consisted of approximately $22.1 million invested in a short duration government fund.

Such investments are not insured by the Federal Deposit Insurance Corporation. The Company completed an evaluation of its investments and determined that it did not have any other-than-temporary impairments as of March 31, 2013 and December 31, 2012.

Functional Currency

The Company's consolidated functional currency is the U.S. dollar. Raptor Pharmaceuticals Europe B.V. ("BV"), Raptor Pharmaceuticals France SAS ("SAS") and RPTP European Holdings C.V. ("CV"), the Company's European subsidiaries and Cayman-based subsidiary, respectively, use the European Euro as their 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.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company's financial instruments, including cash equivalents, restricted cash, accounts payable, accrued liabilities, note payable and capital lease liability approximate fair values due either to length of maturity or interest rates that approximate prevailing market rates. 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.

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.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 March 31, 2013 and December 31, 2012 are summarized as follows:

 

 

See Note 5 for further discussion on the calculation of the fair value of the common stock warrant liability.

Intangible Assets

Intangible assets primarily include the intellectual property and other rights relating to DR Cysteamine (currently developed as PROCYSBI TM / RP103) and to an out-license acquired in a 2009 merger. The intangible assets related to PROCYSBI TM /RP103 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 are amortized using the straight-line method over the estimated useful life of 16 years, which is the life of the intellectual property patents.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

 

Segment Information

 

The Company has determined that it operates in only one segment, as it only reports profit and loss information on an aggregate basis to its chief operating decision maker. The Company’s long-lived assets maintained outside the U.S. are not material.

 

Impairment of Goodwill and Long-Lived Assets

 

 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 one 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 second 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.

’

Accrued Liabilities

Accrued liabilities include estimates of certain expenses which the Company has not yet been invoiced and requires management’s judgment in determining appropriate expenses to accrue. Although the Company believes its accrued liabilities reflect the best information available to it, the Company’s actual expenses could differ from its estimates.

Common Stock Warrant Liabilities

The Company issued warrants that contain conditional obligations that may require the Company to transfer cash to settle the warrants upon the occurrence of certain fundamental transactions. Therefore, the Company has classified the warrants as liabilities.  The Company re-measures the 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 are re-measured and reclassified to equity.

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.

Note Payable and Debt Issuance Costs

Note payable consists of the Company’s loan agreement with HealthCare Royalty Partners II, L.P. (“HC Royalty”), as lender, under which Raptor agreed to borrow $50.0 million in two $25.0 million tranches.  The Company received the first $25 million tranche in December 2012, and the second tranche is expected by the end of May 2013. The loan bears interest at an annual fixed rate of 10.75% of outstanding principal and includes a synthetic royalty component based on sales of products, including PROCYSBI TM , in a calendar year.  The fixed and royalty interest are recognized as interest expense as incurred.  Debt issuance costs, which were capitalized and included in other long-term assets, are being amortized over the life of the loan using the interest method.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Research and Development Costs

Research and development costs are charged to expense as incurred. Research and development expenses include medical, clinical, regulatory and scientists’ salaries and benefits, lab collaborations, preclinical studies, clinical trials, clinical trial materials, commercial drug manufacturing expenses prior to obtaining marketing approval, regulatory and clinical consultants, lab supplies, lab services, lab equipment maintenance and small equipment purchased to support the research laboratory, amortization of intangible assets and allocated human resources and facilities expenses.

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 their financial statements.  The Company recognizes interest and/or penalties related to income tax matters as a component of income tax expense. As of March 31, 2013, there were no liabilities recorded related to uncertain tax positions and no accrued interest or penalties related to uncertain tax positions.

The Company files U.S. Federal, California, various other state income and other tax returns and various 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.

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:

Net loss per share, basic and diluted, was $(0.30) and $(0.29) for the quarters ended March 31, 2013 and February 29, 2012, respectively.

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RAPTOR PHARMACEUTICAL CORP.

 (A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock Option Plan

Compensation cost related to the Company’s stock option plans is measured at the grant date based on the fair value of the equity instruments awarded and is recognized on a straight-line basis 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 Company recognizes expense associated with stock options issued to third parties, including consultants, based upon the fair values of such awards on the dates the awards vest.

Reclassifications

Certain amounts previously reported under specific financial statement captions have been reclassified to be consistent with the current year presentation.

2. INTANGIBLE ASSETS AND GOODWILL

On December 14, 2007, the Company acquired the intellectual property and other rights to develop PROCYSBITM/RP103 to treat various clinical indications from the University of California at San Diego (“UCSD”) by way of a merger with Encode Pharmaceuticals, Inc., a privately held development stage company (“Encode”), which held the intellectual property license with UCSD. The fair value of the intangible assets acquired at the time of the acquisition was approximately $2.6 million’.

 

Pursuant to the license agreement with UCSD, the Company is obligated to pay an annual maintenance fee until the commencement of commercial sales of any licensed products developed.  The Company is also obligated to pay milestone payments upon the occurrence of certain events, royalties on net sales from products developed pursuant to the license agreement and a percentage of sublicense fees or royalties, if any. The Company is obligated to fulfill predetermined milestones within a specified number of 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.

Intangible assets originally recorded as a result of a 2009 merger were approximately $1.1 million, of which $0.9 million was written off to research and development expense during the year ended August 31, 2012, as discussed below.

A summary of intangible assets acquired is as follows:

At August 31, 2012, the Company determined that the capitalized acquired in-process research and development asset carried at $0.9 million, representing the tezampanel and NGX 426 program acquired in a 2009 merger, was fully impaired due to the Company’s decision to discontinue development of this product candidate . During the quarter ended March 31, 2013, the Company did not identify any impairment losses.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the quarters ended March 31, 2013 and February 29, 2012  and the cumulative period from September 8, 2005 (inception) to March 31, 2013, the Company amortized approximately $36,000, $37,000 and $0.8 million, respectively, of intangible assets to research and development expense.

Amortization expense for intangible assets for the periods indicated is expected to be as follows:

The Company tested the carrying value of goodwill for impairment as of the end of its transition period for the four month period ended December 31, 2012 and determined that there was no impairment.

3. FIXED ASSETS

Fixed assets consisted of:

Depreciation expense for the quarters ended March 31, 2013 and February 29, 2012 and the cumulative period from September 8, 2005 (inception) to March 31, 2013 was approximately $36,000, $9,000 and approximately $0.6 million, respectively. Accumulated depreciation on capital lease equipment was approximately $10,000 and $2,000 as of March 31, 2013 and December 31, 2012, respectively.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. NOTE PAYABLE AND DEBT ISSUANCE COSTS

Note payable consists of the Company’s loan agreement with HC Royalty, as lender, under which the Company agreed to borrow $50.0 million in two $25.0 million tranches. As of March 31, 2013, the Company drew down the first tranche in the amount of $25.0 million. With respect to the first $25.0 million tranche, for each calendar year (prorated for any portion thereof), the loan bears a royalty rate of 6.25% of the first $25.0 million of PROCYSBI TM  and future approved product net revenues for such calendar year, 3.0% of the PROCYSBI TM  and future approved product net revenues for such calendar year in excess of $25.0 million and below $50.0 million, and 1.0% of the PROCYSBI TM  and future approved product net revenues for such calendar year in excess of $50.0 million, payable quarterly.

As of March 31, 2013, there was no royalty expense accrued or paid since the Company had no approved products at that time. Subsequent to March 31, 2013, as a result of marketing approval of PROCYSBI TM  for cystinosis by the FDA, synthetic royalties will be payable to HC Royalty upon sales of PROCYSBI TM . As of March 31, 2013, the Company’s note payable balance was $25.0 million.

Unamortized debt issuance costs totaled $1.9 million and $2.0 million as of March 31, 2013 and December 31, 2012, respectively.

 

The loan and the Company’s obligation to make any payments shall terminate immediately when all payments received by HC Royalty from the Company aggregate to $97.5 million. If, by December 20, 2014, net revenues for the immediately preceding four fiscal quarters exceed $100.0 million, then the loan and the Company’s obligation to make any payments shall terminate immediately when all payments received by HC Royalty from the Company aggregate to $90.0 million. The synthetic royalty will be accrued quarterly upon commencement of sales of PROCYSBI TM.

 

To secure the performance of its obligations under the HC Royalty Loan, the Company granted a security interest to HC Royalty in substantially all of its assets, the assets of its subsidiaries and a pledge of stock of certain of its domestic subsidiaries. The Company’s failure to comply with the terms of the HC Royalty Loan agreement and related documents, the occurrence of a change of control of the Company or the occurrence of an uncured material adverse effect on the Company, or the occurrence of certain other specified events, could result in an event of default under the HC Royalty Loan agreement that, if not cured or waived, could result in the acceleration of the payment of all of its indebtedness to HC Royalty and interest thereon.  Under the terms of the security agreement, in an event of default, the lender could potentially take possession of, foreclose on, sell, assign or grant a license to use, the Company’s pledged collateral and assign and transfer the pledged stock of certain of its subsidiaries.  Further, HC Royalty may terminate its commitment to fund the second $25.0 million tranche upon the occurrence of any such event prior to the funding of such tranche.

5. CAPITAL STRUCTURE

Preferred Stock

At March 31, 2013, the Company was authorized to issue 15,000,000 shares of $0.001 par value per share of preferred stock.  There were no shares issued and outstanding.

Common Stock

At March 31, 2013, the Company was authorized to issue 150,000,000 shares of $0.001 par value per share of common stock.  Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held.

As of March 31, 2013 and December 31, 2012, there were 55,431,651 and 52,424,649 shares, respectively, of the Company’s common stock issued and outstanding.

Common Stock Issuance under At-The-Market (“ATM”) Agreement

On April 30, 2012, the Company entered into an “At-the-Market” (“ATM”) Sales Agreement, with Cowen and Company, LLC (“Cowen”), under which the Company may, at its discretion, sell its common stock with a sales value of up to a maximum of $40.0 million through ATM sales on the NASDAQ Stock Market. Cowen is the sole sales agent for any sales made under the ATM for a 3.0% commission on gross proceeds. The common stock is sold at prevailing market prices at the time of the sale of common stock, and, as a result, prices will vary.

Sales in the ATM offering are being made pursuant to the prospectus supplement dated April 30, 2012, as amended by Amendment No. 1 dated June 28, 2012, which supplements the Company’s prospectus dated February 3, 2012, filed as part of the shelf registration statement that was declared effective by the Securities and Exchange Commission (“SEC”) on February 3, 2012. Cumulatively through March 31, 2013, the Company sold 5,059,446 shares under the ATM at a weighted-average selling price of $5.39 per share for net proceeds of approximately $26.4 million.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Common Stock Warrants

During the quarter ended March 31, 2013, the Company received approximately $1.8 million from the exercise of warrants in exchange for the issuance of 600,000 shares of the Company’s common stock. During the cumulative period from September 8, 2005 (inception) through March 31, 2013, the Company received approximately $24.6 million from the exercise of warrants in exchange for the issuance of an aggregate of 10,137,866 shares.

The table reflects the number of common stock warrants outstanding as of March 31, 2013:

*	Weighted-average exercise price

The warrants issued by the Company in the August 2010 private placement and the December 2009 equity financing contain a conditional obligation that may require the Company to transfer assets to repurchase the warrants upon the occurrence of potential future events.A financial instrument that may require the issuer to settle the obligation by transferring assets is classified as a liability. Therefore, the Company has classified the warrants from both financings as liabilities and will mark them to fair value at each period end.

A Black-Scholes option-pricing model was used to estimate the fair value of the warrant liabilities. These warrants were issued in the December 2009 and August 2010 equity financings using the following assumptions at March 31, 2013 and December 31, 2012:

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the quarters ended March 31, 2013 and February 29, 2012, and for the cumulative period from September 8, 2005 (inception) to March 31, 2013, the Company recorded a gain of approximately $1.0 million, losses of approximately $7.8 million and $25.8 million, respectively, in its condensed consolidated statements of operations and comprehensive loss from changes in the fair values of warrants.

Below is the activity of the warrant liabilities for the quarters ended March 31, 2013 and February 29, 2012:

As discussed above, the Company uses the Black-Scholes option pricing model as its method of valuation for warrants that are subject to warrant liability accounting. The determination of the fair value as of the reporting date is affected by Raptor's stock price as well as assumptions regarding a number of highly complex and subjective variables which could provide differing variables. These variables include, but are not limited to, expected stock price volatility over the term of the security and risk-free interest rate. In addition, the Black-Scholes option pricing model requires the input of an expected life for the securities for which we have estimated based upon the stage of the Company's development. The fair value of the warrant liability is revalued each balance sheet date utilizing Black-Scholes valuation model computations with the decrease or increase in fair value being reported in the Condensed Consolidated Statement of Comprehensive Loss as other income or expense, respectively. The Company's reported net loss was approximately $15.9 million for the quarter ended March 31, 2013. If the Company's March 31, 2013 closing stock price had been 10% lower, its net loss would have been approximately $1.7 million lower. If the Company's March 31, 2013 closing stock price had been 10% higher, its net loss would have been approximately $1.7 million higher. If the Company's March 31, 2013 volatility assumption had been 10% lower, its net loss would have been approximately $0.5 million lower. If the Company's March 31, 2013 volatility assumption had been 10% higher, its net loss would have been approximately $0.5 million higher.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. ACCRUED LIABILITIES

Accrued liabilities consisted of:

7. STOCK OPTION PLANS

Stock options are granted to recognize the contributions made by its employees, independent contractors, consultants and directors, to provide those individuals with additional incentive to devote themselves to the Company's future success and to improve its ability to attract, retain and motivate individuals upon whom its growth and financial success depends.  Employee stock options generally vest over four years with a six-month cliff-vesting period.  In general, all options are exercisable over a period not to exceed the contractual term of ten years from the date the stock options are granted at prices not less than the fair market value of the Company's common stock on the grant date.  The Company has and may grant options with different vesting terms from time to time.

 Employee stock-based compensation expense for the quarters ended March 31, 2013 and February 29, 2012, respectively, and for the cumulative period from September 8, 2005 (inception) to March 31, 2013 was as follows:

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation expense was based on the Black-Scholes option-pricing model assuming the following:

*	Dividend rate is 0% for all periods presented.

If factors change and different assumptions are employed, 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 quarters ended March 31, 2013 and February 29, 2012 and for the cumulative period from September 8, 2005 (inception) to March 31, 2013 was approximately $4,000, $0 and $0.8 million, respectively, of which cumulatively approximately $0.1 million was included in general and administrative expense and approximately $0.6 million was included in research and development expense for the cumulative period.

A summary of the activity in the 2010 Equity Incentive Plan, the 2006 Equity Compensation Plan, as amended and the Company's other stock option plans, is as follows:

There were approximately 1.8 million options available for grant as of March 31, 2013 under the 2010 Equity Incentive Plan, as amended (the "Plan").

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2013, the options outstanding under all of the Company's stock option plans consisted of the following:

At March 31, 2013, the total unrecognized compensation cost was approximately $13.6 million. The weighted-average period over which it is expected to be recognized is approximately 3 years.

8.  COMMITMENTS AND CONTINGENCIES

The Company maintains several contracts with drug labelers and distributors, research organizations, contract manufacturers, clinical organizations and clinical sites, primarily to assist with clinical research and clinical and commercial manufacturing and distribution of PROCYSBI TM and clinical manufacturing of drug product for the Company’s HD and NAFLD clinical collaborations.  The Company's contractual obligations did not change materially during the quarter ended March 31, 2013 compared to those disclosed as of December 31, 2012.

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RAPTOR PHARMACEUTICAL CORP.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9.  SUBSEQUENT EVENTS

On April 30, 2013, the Company’s lead product candidate, PROCYSBITM (cysteamine bitartrate) delayed-release capsules, received marketing approval from the FDA for the management of nephropathic cystinosis in adults and children six years and older.  The Company plans to commercially launch PROCYSBI TM in the U.S. in the second quarter of 2013 and anticipates the Company’s expenses will increase due to significant commercialization activities followed by the uptake of net revenues.  As a result of drug approval, the Company will commence capitalizing commercial inventory on May 1, 2013.  Due to the nature of the success rate of drug development, it is the Company’s accounting policy to expense drug product manufacturing costs as research and development expenses until that drug product has received marketing approval in a significant market.

On April 25, 2013, the Company executed a seven year lease for facilities in Novato, California, which it will inhabit by June 30, 2013 to accommodate personnel growth. The Company will make lease payments of $19,460 per month under this new lease which commences in June 2013 through May 2014. The Company plans to move to an adjacent facility which becomes available in 2014. Rental expense for the larger adjacent facility will be higher than the facility into which the Company will initially move.

On April 3, 2013, the Company executed two contracts with Accredo Health Group, Inc. (“Accredo”) to provide the Company exclusive distribution and specialty pharmacy services for PROCYSBI TM to cystinosis patients in the U.S. Accredo will be Raptor’s only significant customer of PROCYSBI TM in the U.S. Accredo will receive a distributor fee for warehousing and distribution of PROCYSBI TM along with a rebate for pharmacy services based upon customary terms. These costs will be captured in cost of sales upon commencement of services.

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our condensed consolidated financial statements as of March 31, 2013, 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., Raptor Pharmaceuticals Inc. or Raptor Pharmaceuticals, Raptor European Products, LLC, RPTP European Holdings C.V., Raptor Pharmaceuticals Europe B.V. and Raptor Pharmaceuticals France SAS.

This Quarterly Report on Form 10-Q, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, that plan for or anticipate the future. 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," "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 operations, 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. We cannot give you any assurance that such forward-looking statements will prove to be accurate and such forward-looking events may not occur. 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" in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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 on Form 10-Q to reflect later events or circumstances or to reflect the occurrence of unanticipated events or any other reason.

Change in Fiscal Year End

In December 2012, our board of directors approved a change in our fiscal year end from August 31 to December 31. The following discussions compare the unaudited periods from January 1 through March 31, 2013, the first quarter of our newly adopted fiscal year and our prior year’s fiscal quarter from December 1, 2011 through February 29, 2012. The prior fiscal year quarter ended February 29, 2012 is reported on the basis of our previous fiscal year cycle. As a result of the change in our fiscal year end, the quarterly periods of our newly adopted fiscal year do not coincide with the historical quarterly periods that we had previously reported. We believe the comparative information provided for the three-month period ended February 29, 2012 provides a meaningful comparison to the three-month period ended March 31, 2013 and there are no factors, seasonal or otherwise, that materially impact the comparability of information or trends.

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 first product, PROCYSBITM (cysteamine bitartrate) delayed-release capsules, or PROCYSBITM, received marketing approval from the U.S. Food and Drug Administration, or FDA, on April 30, 2013 for the management of nephropathic cystinosis in adults and children six years and older.  PROCYSBI TM  (formerly known as RP103) capsules contain cysteamine formulated into innovative microspheronized beads that are individually enteric coated providing a delayed-release pharmacokinetic profile.  The enteric coating makes PROCYSBI™ pH sensitive, allowing the microbeads to bypass the stomach and be absorbed in the more alkaline environment of the proximal small intestine.  PROCYSBI TM  is dosed every twelve hours for the management of nephropathic cystinosis.  We plan to commence the launch of PROCYSBI TM  in the U.S. in the second quarter of 2013.  In conjunction with the pending launch of PROCYSBI TM , we have initiated a dedicated call center, which will serve as an integrated resource for PROCYSBI TM  prescription intake, third-party payor reimbursement adjudication, patient financial support and ongoing outreach for managing compliance.  This call center, along with one specialty pharmacy and proactive physician and patient disease education initiatives, reflect our commitment to helping patients manage their disease.  In Europe, we submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, in the first quarter of calendar 2012, requesting approval to market PROCYSBI TM  for the management of nephropathic cystinosis in the EU.  We anticipate a decision from the EMA in the second half of 2013.

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We expect that our near term efforts will be focused on:

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Commercializing PROCYSBITM in the U.S.;

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Gaining regulatory approval of PROCYSBITM in the EU;

●

Negotiating reimbursement country by country within the EU and the launching of PROCYSBITM in those countries, if approved by the EMA;

●

Supporting our clinical trials that are evaluating PROCYSBITM in cystinosis patients that are cysteamine-naïve, as well as other supporting studies;

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Supporting our clinical trials of RP103 for the potential treatment of Huntington’s disease, or HD, and nonalcoholic fatty liver disease, or NAFLD, in children;

●

Continuing the development of our novel preclinical programs.

Nephropathic Cystinosis, or Cystinosis

Cystinosis is a rare, inherited condition that affects every cell of the body by causing the buildup of a protein building block called cystine.  The buildup of cystine causes kidney and other problems throughout the body.  These problems cause the body to lose too much sugar (glucose), proteins and salts (electrolytes) through urine and harm tissue.  Cystinosis may lead to slow body growth and small stature, weak bones, hypothyroidism, blindness, muscle weakness, pulmonary dysfunction and developing and worsening kidney failure.

It is estimated that there are currently about 500 people in the U.S. – 2,000 worldwide – diagnosed with this disorder. Cystinosis is classically associated with blond-haired, blue-eyed children of European descent, although all races and ethnic backgrounds may be affected. The disease tends to affect slightly more males than females, with a male-to-female ratio of 1.4 to 1.

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Results of Operations

Quarters ended March 31, 2013 and February 29, 2012

Revenue

On April 30, 2013, the FDA granted marketing approval in the U.S. for the sale of our first product, PROCYSBITM, for the management of nephropathic cystinosis.  As such, through March 31, 2013, we have not yet generated revenues from the sale of PROCYSBI TM.

Research and Development

Research and development expenses include medical, clinical, regulatory and scientists' compensation and benefits, expenses associated with the manufacturing and testing of PROCYSBI TM  in anticipation of our commercial launch in the U.S. (all drug product manufactured before drug approval is expensed as research and development expense), 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 human resources and facilities expenses. Research and development expenses for the quarter ended March 31, 2013 increased by approximately $4.4 million compared to the quarter ended February 29, 2012. The increase was primarily due to:

General and Administrative Expenses

General and administrative expenses include finance, executive and pre-commercial operations compensation and benefits; pre-commercial expenses, such as reimbursement and marketing studies, expenses associated with the commercial launch of PROCYSBI TM  such as printing of physician and patient education materials, setting up RaptorCares.com to adjudicate insurance claims and provide patient support, and establishing a customer relationship management system for our PROCYSBI TM  sales team; corporate costs, such as legal and auditing fees, business development expenses, travel, board of director fees and expenses, investor relations expenses, intellectual property expenses associated with filed (but not issued) patents, administrative consulting and allocated human resources and facilities costs. General and administrative expenses for the quarter ended March 31, 2013 increased by approximately $5.4 million compared to the quarter ended February 29, 2012. The increase was primarily due to:

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Major program expenses recorded as research and development expenses:

Major program expenses recorded as general and administrative expenses:

Additional major program expenses include expenses related to the preparation for the commercial launch of PROCYSBI TM and 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. In addition, the timing and costs of development of our programs beyond the next 12 months are highly uncertain and difficult to estimate. See risks and other factors described under the section captioned "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.

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Interest Income

Interest income for the quarters ended March 31, 2013 and February 29, 2012 was approximately $0.2 million and $0.1 million, respectively.

Interest Expense

Interest expense for the quarters ended March 31, 2013 and February 29, 2012 was approximately $0.7 million and nominal, respectively. The increase in interest expense was due to our debt facility we entered into in December 2012.

Foreign Currency Transaction Gain

Foreign currency transaction gain/loss for the quarters ended March 31, 2013 and February 29, 2012 was approximately a $34,000 loss and $18,000 gain, respectively.

Unrealized Gain/Loss on Short-Term Investments

Unrealized gain/loss on short-term investments represents the change in net asset value of our short-term bond fund. The unrealized loss on short-term investments for the quarter ended March 31, 2013 was approximately $0.1 million compared to an unrealized gain of approximately $0.1 million for the quarter ended February 29, 2012.

 Adjustment to the Fair Value of Common Stock Warrants

Adjustment to the fair value of common stock warrants was a gain of approximately $1.1 million for the quarter ended March 31, 2013 compared to a loss of approximately $7.8 million for the quarter ended February 29, 2012. The gain for the quarter ended March 31, 2013 was due primarily to a decrease in the volatility of our stock price. The loss in the comparable quarter ended February 29, 2012 was due primarily to an increase of $1.46 per share in our stock price for which we were required to increase our warrant liability. These losses are non-cash.

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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., or GAAP. 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 condensed 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 condensed consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

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 condensed consolidated financial statements. The warrant liability is carried at fair value which is determined using the Black-Scholes option valuation model at the end of each reporting period.

Accrued Liabilities

Accrued liabilities include estimates of certain expenses which we have not yet been invoiced and requires management’s judgment in determining appropriate expenses to accrue. For example, because of the nature of how clinical trials are invoiced by clinical sites, especially outside of the U.S. where there is a significant time lag between the services provided by the clinical site and the time the clinical site bills us for their services, we must estimate such clinical site expenses on a monthly basis as clinical trial expenses. Although we believe our accrued liabilities reflect the best information available to us, our actual expenses could differ from our estimates.

Note Payable and Debt Issuance Costs

Note payable consists of our loan agreement with HealthCare Royalty Partners, or HC Royalty, as lender.  We agreed to borrow $50.0 million in two $25.0 million tranches, or the HC Royalty Loan.  As of March 31, 2013, we have drawn the first tranche in the amount of $25.0 million, which is stated at the borrowed amount.  Due to the approval of PROCYSBI TM by the FDA on April 30, 2013, HC Royalty is required to fund the second tranche subject to the satisfaction of customary closing conditions.  We are in the process of drawing down the second $25.0 million tranche.  The loan bears interest at an annual fixed rate of 10.75% of outstanding principal and quarterly interest payments are included in interest expense in our Condensed Consolidated Statements of Comprehensive Loss for the quarter ended March 31, 2013.  Principal payments, when made, reduce our note payable balance. There is a synthetic royalty component based on sales of products in a calendar year, and such royalty is payable quarterly.  With respect to the first $25.0 million tranche, for each calendar year (prorated for any portion thereof), the loan bears a royalty rate of 6.25% of the first $25.0 million of PROCYSBI TM  and future approved product net revenues for such calendar year, 3.0% of PROCYSBI TM  and future approved product net revenues for such calendar year in excess of $25.0 million and not in excess of $50.0 million, and 1.0% of PROCYSBI TM  and future approved product net revenues for such calendar year in excess of $50.0 million, payable quarterly. With respect to the second $25.0 million tranche, for each calendar year (prorated for any portion thereof), the loan bears a royalty rate of 6.0% of the first $25.0 million of PROCYSBI TM  and future approved product net revenues for such calendar year, 3.0% of PROCYSBI TM  and future approved product net revenues for such calendar year in excess of $25.0 million and not in excess of $50.0 million, and 1.0% of PROCYSBI TM  and future approved product net revenues for such calendar year in excess of $50.0 million, payable quarterly.

As of March 31, 2013, there was no royalty expense accrued or paid since we had no approved products at that time and future revenues were not yet estimable.  Subsequent to quarter-end, we received marketing approval of PROCYSBI TM  for nephropathic cystinosis by the FDA on April 30, 2013, and as a result, synthetic royalties will be payable to HC Royalty quarterly following commencement of sales of PROCYSBI TM .  The loan and our obligation to make any payments shall terminate immediately when all payments received by HC Royalty from us equals $97.5 million, except that if, by December 20, 2014, net revenues for the immediately preceding four fiscal quarters exceed $100.0 million, then the loan and our obligation to make any payments shall terminate immediately when all payments received by HC Royalty from us equals $90.0 million.  Debt issuance costs, which were capitalized and included in other long-term assets, are being amortized over the life of the loan using the effective interest method.  The amortization of debt issuance costs is included in interest expense in our Condensed Consolidated Statements of Comprehensive Loss. The synthetic royalty will be accrued quarterly upon commencement of sales of PROCYSBI TM.

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Goodwill and Intangible Assets and Related Impairment of Long-Lived Assets

We periodically 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.

Goodwill represents the excess of the value of the purchase consideration over the identifiable assets acquired in the merger of our subsidiary with and into Raptor Pharmaceuticals Corp. in September 2009, or the 2009 Merger. Goodwill is reviewed annually, or when an indication of impairment exists. An impairment analysis is performed, and if necessary, a resulting write-down in valuation is recorded.

Intangible assets include the intellectual property and other rights relating to DR Cysteamine (currently developed as PROCYSBI TM and RP103) and to an out-license acquired in the 2009 Merger. The intangible assets related to PROCYSBI TM /RP103 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 are amortized using the straight-line method over the estimated useful life of 16 years, which is the life of the intellectual property patents. During the quarter ended March 31, 2013, we did not identify any impairment losses.

Common Stock Warrant Liabilities

The warrants issued by us in our 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 , or ASC 480, 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 Condensed Consolidated Statements of Comprehensive Loss. Warrants which are recorded as liabilities that are exercised are re-measured and marked to market the day prior to exercise. Upon exercise of such warrants, the fair value of those 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 quarter ended March 31, 2013 and we have determined that our effective tax rate for our fiscal year ended August 31, 2012 and the short tax year from September 1, 2012 to December 31, 2012 is 0%. 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, or 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, or 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 March 31, 2013, there were no accrued interest or penalties related to uncertain tax positions.

We file U.S. Federal, California and other state income tax returns. In addition, we file income tax returns in France and the Netherlands. We are currently not subject to any income tax examinations. Due to our NOLs, generally all tax years remain open.

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Stock-Based Compensation

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. If actual results differ significantly from these estimates, stock-based compensation expense and results of operations could be materially impacted.

For the quarter ended March 31, 2013, stock-based compensation expense was based on the Black-Scholes option-pricing model assuming the following: risk-free interest rate of 0.82%; five year expected life; 68% volatility; 2.5% turnover rate; and 0% dividend rate.

We based our Black-Scholes inputs on the following factors:

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the risk-free interest rate was based upon our review of current constant maturity treasury bill rates for five years;

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the expected life of five 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 a combination of the actual annualized volatility of our common stock price as quoted on NASDAQ since the closing of our 2009 Merger on September 30, 2009 and of annualized volatility of peer companies as reported in their respective SEC filings; and

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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 condensed 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.

Recent Accounting Pronouncements

None.

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Liquidity and Capital Resources

Capital Resource Requirements

As of March 31, 2013, we had approximately $58.4 million in cash, cash equivalents and short-term investments, approximately $20.0 million in current liabilities (of which approximately $12.7 million represented the non-cash common stock warrant liability) and approximately $40.0 million of net working capital.

We estimate that without regard to any other future sources of funds, our cash, cash equivalents and short-term investments of approximately $58.4 million as of March 31, 2013 plus estimated net proceeds of approximately $23.4 million we are in the process of drawing as the second tranche of our $50.0 million loan agreement with HC Royalty, will be sufficient to meet our obligations into the second quarter of 2014.

The $50.0 million HC Royalty loan agreement executed on December 20, 2012, matures on December 31, 2019, bears interest at an annual fixed rate of 10.75% and a variable royalty rate, tiered down, based on a percentage of PROCYSBI TMand future approved product net revenues. The loan is interest-only for the first two years. The proceeds for the loans will be used primarily to help fund the commercialization of PROCYSBI TM , advance our development programs and for general corporate purposes. (See Note 4 – Notes Payable and Debt Issuance Costs for further information.)

On April 30, 2012, we entered into a Sales Agreement with Cowen and Company, or Cowen, to sell shares of our common stock, with aggregate gross sales proceeds of up to $40.0 million, from time to time, through an "at the market" equity offering program under which Cowen acts as sales agent. We pay a 3.0% commission to Cowen on any sales pursuant to this Sales Agreement. Through March 31, 2013, we sold 5,059,446 shares at a weighted-average sales price of $5.39 per share for net proceeds of approximately $26.4 million. As of March 31, 2013, $12.7 million of gross proceeds remains available for future sales under this Sales Agreement.

As of March 31, 2013, Series A warrants to purchase up to 631,250 shares of our common stock were outstanding, all of which warrants were issued pursuant to a definitive securities purchase agreement, dated as of December 17, 2009. The outstanding Series A warrants are exercisable until December 22, 2014, at a per share exercise price of $2.45.

As of March 31, 2013, 2,592,424 shares (including the placement agent warrant described below) of our common stock warrants were outstanding, all of which warrants were issued pursuant to private placement purchase agreements, dated as of August 9, 2010. Each warrant, exercisable for 5 years from August 12, 2010, has an exercise price of $3.075 per share. The placement agent warrant that we issued to the placement agent for this private placement is for the purchase 97,952 shares of our common stock at an exercise price of $3.075 per share.

Future Funding Requirements

We may need to raise additional capital either through the sale of equity or debt securities (including convertible debt securities) to fund our operations and to, among other activities, commercialize PROCYSBI TM  and to develop RP103 for various indications. Our future capital requirements may be substantial, and will depend on many factors, including:

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the success of our U.S. commercial launch of PROCYSBITM including patient and revenue uptake;

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the cost of establishing the sales and marketing capabilities in the U.S. and EU necessary for the U.S. commercial launch of PROCYSBI TM  and the potential EU launch, if approved;

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the decisions of the EMA with respect to our application for marketing approval of PROCYSBITM in the EU; the costs of activities related to the regulatory approval process; and the timing of approval, if received and the potential EU launch, if approved;

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our ability to negotiate reimbursement and pricing of PROCYSBITM in the EU; if approved;

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the cost of additional clinical trials in order to obtain regulatory approvals for PROCYSBITM in non-U.S. and non-EU countries;

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the timing and cost of our ongoing clinical programs for RP103, including: evaluating PROCYSBITM in treatment-naïve cystinosis patients, and other supportive studies; evaluating RP103 as a potential treatment for Huntington's disease; and evaluating RP103 as a potential treatment for NAFLD;

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the cost of filing, prosecuting and enforcing patent claims; and

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the cost of our manufacturing-related activities in support of PROCYSBITM and RP103.

There can be no assurance that we will be successful in raising sufficient funds when needed. Additional financing may not be available in amounts or on terms satisfactory to us, or at all.

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Commitments and Contingencies

We maintain several contracts with drug labelers and distributors, research organizations, contract manufacturers, clinical organizations and clinical sites, primarily to assist with clinical research and clinical and commercial manufacturing of PROCYSBI TM  and clinical manufacturing of our HD and our NAFLD clinical collaborations. Our contractual obligations have not changed significantly during the quarter ended March 31, 2013 compared to those discussed in our Transition Report on Form 10-KT for the four month period ended December 31, 2012, filed with the SEC on March 14, 2013.

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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates and impacts our marketable securities. We do not have any derivative financial instruments.

Our market risks during the quarter ended March 31, 2013 have not materially changed from those discussed in our Transition Report on Form 10-KT for the four month period ended December 31, 2012, filed with the SEC on March 14, 2013.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective, at the reasonable assurance level, in ensuring 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, or the Exchange Act, 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 we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving our control objectives.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2013, we hired a Controller which increases our ability to implement additional internal control procedures. There have not been any other factors that have materially affected or are reasonably likely to have a negative material impact on our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

We are not subject to any material legal proceedings

ITEM 1A.

RISK FACTORS.

An investment in our common stock involves a high degree of risk. Before investing in our common stock, you should consider carefully the specific risks detailed in this "Risk Factors" section, together with all of the other information contained in this Quarterly Report on Form 10-Q. If any of these risks occur, our business, results of operations and financial condition could be harmed, the price of our common stock could decline, and you may lose part or all of your investment.

Risks Associated with Product Development and Commercialization

We currently depend entirely on the success of our lead drug, PROCYSBITM. If we do not successfully commercialize PROCYSBI TM or obtain EU approval of PROCYSBI TM our financial results and financial condition will be adversely affected.

On April 30, 2013, the U.S. Food and Drug Administration, or FDA, approved PROCYSBITM (cysteamine bitartrate) delayed-release capsules for the management of nephropathic cystinosis in adults and children six years and older, permitting us to commercially market and distribute PROCYSBI TM  in the U.S. for this indication.  The success of our commercial launch of PROCYSBI TM will likely drive our value as reflected in the trading price of our common stock.  However, we do not have experience in commercializing therapeutics.  If our PROCYSBI TM launch is not as robust as expected by analysts and investors, our value may not increase or could significantly decrease.  We have not yet obtained marketing approval in the EU, where we believe there is a significant number of cystinosis patients.  If we do not obtain marketing approval in the EU, our business prospects will decline.  The successful commercialization of PROCYSBI TM will depend on several factors, including:

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the successful launch of PROCYSBITM in the U.S., including, among other factors, identification of potential physician prescribers and potential patients for, and obtaining sales, of PROCYSBI TM ;

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approval of PROCYSBITM in the EU for the management of nephropathic cystinosis by the EMA;

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the successful launch of PROCYSBITM in the EU and other selected territories throughout the economically developed world, if approved;

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effective communication distinguishing the safety and efficacy of PROCYSBITM from competitive products or alternative therapeutic regimes;

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acceptance of  PROCYSBITM by physicians, parents, patients and cystinosis research/advocacy organizations including the conversion from the existing standard of care to PROCYSBI TM ;

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appropriate reimbursement for PROCYSBITM from commercial health plans and government health programs, which we refer to collectively as third-party payors;

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compliance with regulatory requirements including fulfilling any FDA required post-approval commitments;

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provision of affordable out-of-pocket cost to patients and/or other programs to ensure patient access to PROCYSBITM;

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approval by the EMA and other regulatory agencies of appropriate product labeling for PROCYSBITM;

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execution and maintenance of agreements with wholesalers and distributors on commercially reasonable terms;

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manufacture and supply of adequate quantities of  PROCYSBITM to meet commercial demand;

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development and maintenance of intellectual property protection for PROCYSBITM; and

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execution of robust pre-launch, commercial launch and ongoing commercial operations and medical affairs' activities in support of marketing and sales requirements.

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If we fail to successfully commercialize PROCYSBITM at sufficient sales levels or gain EU approval of PROCYSBITM within a reasonable time period, we will be unable to sustain or grow our business and we may never become profitable, and our business, financial condition and results of operations will be adversely affected.

If we are unable to expand the use of RP103 and receive regulatory approval for any other indication, we may delay or cease some of our product development activities, which would adversely affect the longer term value of RP103 and our growth prospects.

We must obtain and maintain appropriate approvals from regulatory agencies in each of the markets in which we intend to market our products before we may market them. If we receive approvals for our products, we may only market our products for the specific uses that are reflected in the product’s approved labeling. In the U.S., we are permitted to market RP103 for the management of nephropathic cystinosis in adults and children six years and older under the brand name PROCYSBI TM , and we may not market RP103 in the U.S. for any other indication.  We do not have approval of RP103 in any other market and we are not permitted to market RP103 in these markets until we obtain necessary regulatory approvals. To market a new drug in the U.S., we must submit to the FDA and obtain FDA approval of a new drug application, or NDA for each individual indication. To market a new drug in Europe, we must submit to the EMA or relevant regulatory authority in the designed Reference Member State and obtain approval of an MAA for each individual indication. An NDA or MAA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls, to demonstrate the safety and efficacy of the applicable product candidate for the treatment of each individual indication.

We have additional product development programs in the clinical testing stage for the use of RP103 in HD and in NAFLD. These product development programs have not advanced to the stage of a submission for marketing approval to the FDA or EMA or to any other regulatory body in any other jurisdiction.

Obtaining approval of an NDA or MAA or any other filing for approval in a foreign country is an extensive, lengthy, expensive and uncertain process. The FDA, EMA or other regulatory authorities may reject a filing or delay, limit or deny approval of RP103 for many reasons, including:

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the results of clinical trials may not meet the level of statistical significance or clinical significance required by the FDA, EMA and/or other regulatory authorities for approval;

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the FDA, EMA or other regulatory authorities may disagree with the number, design, size, conduct or implementation of our clinical trials; may not find the data from preclinical studies and clinical trials sufficient to demonstrate that RP103 has adequate clinical and other benefits and an adequate safety profile; or may disagree with our interpretation of data from preclinical studies or clinical trials and require that we conduct one or more additional trials;

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the FDA, EMA or other regulatory authorities may not accept data generated at our clinical trial sites;

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the FDA, EMA or other regulatory authorities may have difficulties scheduling an advisory committee meeting (if required) in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the regulatory agency require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

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the FDA, EMA or other regulatory authorities may require additional preclinical or clinical studies or other data prior to granting approval, and we may not be able to generate the required data on a timely basis, if at all;

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the FDA, EMA or other regulatory authorities may impose limitations on approved labeling of RP103, thus introducing reimbursement complications which may limit access for intended uses;

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the FDA, EMA or other regulatory authorities may identify deficiencies in the manufacturing processes or in the facilities of our third party contract manufacturers, or may require us to manufacture additional validation batches or change our process or specifications;

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we may not be able to validate our manufacturing process to the satisfaction of the FDA, EMA or other regulatory authorities, or they may not agree with our plan for concurrent validation; or

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the FDA, EMA or other regulatory authorities may change approval policies or adopt new regulations.

Despite regulatory guidelines, we cannot reliably predict if or when any of the drug product candidates we are developing or intend to develop will be approved for marketing. If we fail to gain regulatory approval for RP103 for other indications, our financial results and financial condition will be adversely affected. In such a case, we will have to delay or terminate some or all of our research product development programs and may be forced to dramatically restructure or cease operations.

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PROCYSBITM and our other future product candidates will be subject to labeling and other restrictions or potential market withdrawal, and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

Any regulatory approvals that we obtain for PROCYSBITM or our product candidates will also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval. The FDA strictly regulates the promotional claims that may be made about prescription products and our product labeling, advertising and promotion is subject to regulatory requirements and continuing regulatory review. Physicians may nevertheless prescribe our product to their patients in a manner that is inconsistent with the approved label, or off-label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

In addition, if the FDA, EMA or other regulatory authorities approve a product candidate, the manufacturing processes, labeling, packaging, distribution, storage, adverse event reporting, dispensation, distribution, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements will include submissions of safety and other post-marketing information and reports, ongoing maintenance of product registration, as well as continued compliance with cGMPs (good manufacturing practices), GCPs (good clinical practices), and GLPs (good laboratory practices). If we do not comply with the applicable regulations and requirements, the range of possible sanctions includes issuance of adverse publicity, product recalls or seizures, fines, total or partial suspensions of production and/or distribution, suspension of marketing applications and enforcement actions, including injunctions and civil or criminal prosecution. The FDA, EMA and other international regulatory agencies can withdraw a product's approval, including PROCYSBI TM , under some circumstances, such as the failure to comply with regulatory requirements or unexpected safety issues.

If serious adverse side effects are associated with PROCYSBITM, our business could be harmed.

The FDA-approved prescribing information for PROCYSBITM for the management of nephropathic cystinosis includes several warnings relating to observed adverse reactions.  With commercial use and additional clinical trials, we expect to continue to update adverse reactions listed in the prescribing information. If additional adverse reactions emerge, or a pattern of severe or persistent previously observed side effects is observed in the relevant patient populations, the FDA or other regulatory agencies could modify or revoke marketing approval or we may choose to withdraw PROCYSBI™ from the market. If this were to occur, we may be unable to obtain marketing approval in additional indications. In addition, if patients receiving PROCYSBI™ were to suffer harm as a result of their use of the product, these patients or their representatives may bring claims against us. These claims, or the mere threat of these claims, could have a material adverse effect on our business and results of operations.

Pressure on drug product third-party coverage and reimbursement/pricing may impair our ability to be reimbursed for PROCYSBI TM  and our other future product candidates at prices or on terms sufficient to provide a viable financial outcome.

Market acceptance and sales of PROCYSBITM and any product candidates that we may develop will depend in large part on global reimbursement policies and may be affected by future healthcare reform measures in the U.S. as well as the EU and other key international markets. The continuing efforts of governmental and third-party payors to contain, reduce or shift the costs of healthcare through various means may harm our business. Successful commercialization of our products will depend in part on the availability of governmental and third-party private payor reimbursement for the therapeutic value of our products.  For example, in many foreign markets, the pricing or profitability of healthcare products is subject to government control. In the U.S., there has been, and we expect there will continue to be, a number of federal and state proposals to implement similar government price control.  The implementation or even the announcement of any of these legislative or regulatory proposals or reforms could harm our business, by reducing the prices we are able to charge for our products, reducing the reimbursement rates for our products and increasing governmental rebates, impeding our ability to achieve profitability, raise capital or form collaborations. In particular, in the U.S., private health insurers and other third-party payors often follow the coverage and reimbursement policies of government payors, including the Medicare or Medicaid programs.  In many European countries, patients are unlikely to use prescription drugs that are not reimbursed by their governments. Further, the increased emphasis on managed healthcare in the U.S. and on country and regional pricing and reimbursement controls in the EU will put additional downward pressure on product pricing, reimbursement and usage, which may adversely affect our product sales and results of operations. In the U.S., EU and other significant or potentially significant markets for our product candidates, government authorities and third-party payors are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted in lower average selling prices. These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, drug coverage and reimbursement policies and pricing in general. For PROCYSBI TM , we will not know what reimbursement rates will be until we enter into payor negotiations.  For our other product candidates, we will not know what the reimbursement rates will be until we obtain regulatory approval and then launch and enter into payor negotiations.  If we are unable to obtain sufficiently high reimbursement rates for our products, they will not be commercially viable.

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Even with U.S. approval of PROCYSBITM, our ability to generate revenues from PROCYSBITM will be subject to attaining significant market acceptance among physicians, patients, patient families, healthcare payors and the healthcare community.

PROCYSBITM may not attain market acceptance among physicians, patients, patient families, healthcare payors or the healthcare community compared to the current standard of care. We believe that the degree of market acceptance and our ability to generate revenues from PROCYSBI TM  will depend on a number of factors, including:

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availability and relative efficacy and safety of therapeutic alternatives;

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the price of our products, both in absolute terms and relative to alternative treatments;

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timing of market introduction of our products as well as competitive drugs;

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efficacy and safety and real-world patient and physician experience with PROCYSBITM;

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identification of currently diagnosed and undiagnosed patients and continued projected growth of the cystinosis market;

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prevalence and severity of any side effects;

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acceptance by patients, patient families, primary care specialists and key specialists including conversion from the existing standard of care;

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potential or perceived advantages or disadvantages of our products compared to alternative treatments, including safety, efficacy, cost of treatment and relative convenience and ease of administration;

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strength of sales, marketing, market access, medical affairs and distribution support;

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the effect of current and future healthcare laws;

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availability of coverage and adequate reimbursement and pricing from government and other third-party payors; and

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breadth of product labeling or product insert requirements of the FDA, EMA or other regulatory authorities.

If PROCYSBITM does not receive significant market acceptance among physicians, patients, patient families, healthcare payors or the healthcare community, our ability to generate revenues from PROCYSBI TM  will be severely affected.

Because the target patient populations for some of our drug product candidates, including PROCYSBITM, are small, we must achieve significant market share and obtain relatively high per-patient prices for our products to achieve meaningful gross margins.

PROCYSBITM and our clinical development of RP103 target diseases with small patient populations, including cystinosis and HD. A key component of the successful commercialization of a drug product for these indications includes identification of patients and a targeted prescriber base for the drug product. Due to small patient populations, we believe that we would need to have significant market penetration to achieve meaningful revenues and identifying patients and targeting the prescriber base are key to achieving significant market penetration. In addition, the per-patient prices at which we sell PROCYSBI TM  and RP103 for these indications will need to be relatively high in order for us to generate an appropriate return for the investment in these product development programs and achieve meaningful gross margins. There can be no assurance that we will be successful in achieving a sufficient degree of market penetration and/or obtaining high per-patient prices for PROCYSBI TM  and RP103 for diseases with small patient populations.

If we fail to obtain or maintain orphan drug exclusivity or regulatory 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 EMA 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 (with an additional half year if for a pediatric indication). 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 from the EMA with a 10-year period of market exclusivity.

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Because the extent and scope of patent protection for some of our drug products may be 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 PROCYSBI TM  or RP103 under the Hatch-Waxman Act, PROCYSBI TM  or RP103 are eligible for a 3-year regulatory exclusivity period as a reformulated version of a previously approved drug substance for which clinical studies that are essential for approval have been conducted in addition to the half year pediatric exclusivity, as applicable. However, if we do not obtain orphan drug exclusivity for our drug products that do not have strong 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 been granted orphan drug designation prior to the approval of PROCYSBITM for the potential treatment of cystinosis and RP103 for the potential treatment of HD, and even if we obtain orphan drug designation for our future drug product candidates, we may not fulfill the criteria for renewed exclusivity for PROCYSBI TM  since the active ingredient in PROCYSBI TM  had been granted exclusivity in the 1990s by another company or 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.

The priority review for our drug product candidates, if obtained, may not actually lead to a faster review process.

In the future, we may request six month priority review from the FDA and EMA for RP103 for HD and our other drug product candidates; however, the FDA and EMA may not grant it. Without priority review, the FDA and EMA review timeline could be at least 10 to 12 months. Under the FDA policies, a drug candidate is eligible for priority review 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 lengthier review process will delay revenue from the sale of products and will increase the capital necessary to fund these product development programs. Obtaining priority review from the FDA does not guarantee FDA approval of our NDA or that the FDA will not request additional information, including requesting additional clinical studies, during its review. Any request for additional information or clinical data could delay the FDA’s timely review of our NDA.

Even though we have obtained U.S. regulatory approval for PROCYSBITM, we will be subject to ongoing regulatory obligations, oversight and continued regulatory review, which may result in significant additional expense.

Although we received U.S. marketing approval for PROCYSBITM, approval of PROCYSBITM in the EU could contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and extraordinary requirements for surveillance to monitor the safety and efficacy of the drug product.  Post-marketing studies and/or post-market surveillance may suggest that a product causes undesirable side effects which present an increased risk to the patient.  If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or identify data that suggest that one of our approved products may present a risk to safety, the regulatory authorities could withdraw our product approval, suspend production or place other marketing restrictions on our products. If regulatory sanctions are applied or if regulatory approval is delayed or withdrawn, our growth prospects and our operating results will be adversely affected.

If we fail to obtain and maintain approval from regulatory authorities in international markets for PROCYSBITM, RP103 and any future product candidates for which we have rights in international markets, our market opportunities will be limited and our business will be adversely impacted.

Sales of PROCYSBITM, RP103 and our other product candidates outside of the U.S. will be subject to foreign regulatory requirements governing clinical trials, manufacturing and marketing approvals. Even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries, including the EMA, must also approve the manufacturing and marketing of our product candidates in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the U.S., including additional preclinical studies or clinical trials or manufacturing and control requirements. In many countries outside the U.S., a product candidate must be approved for reimbursement before it can be approved for sale in that country. In many cases, the price that we propose to charge for our products is also subject to approval by individual countries before we can launch our product candidates in those countries. Obtaining foreign regulatory approvals, complying with foreign regulatory requirements and gaining approved pricing and reimbursement could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others.

If we fail to demonstrate safety or efficacy in our preclinical studies or clinical trials or keep to the terms of a product development program, our future business prospects for these drug product candidates 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 safety and efficacy in preclinical studies and clinical trials. Preclinical studies involve testing drug product candidates in appropriate multiple 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.

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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. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. The clinical trial process may fail to demonstrate with statistical significance 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 NDA as applicable, with the FDA, EMA or other regulatory agencies 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. The failure to demonstrate safety or efficacy in our clinical trials would have a material adverse effect on our future business prospects, financial condition and operating results.

The use of any of our drug product candidates in clinical trials or the commercialization of PROCYSBITM may expose us to liability claims.

The nature of our business exposes us to potential liability risks inherent in the testing (including through human trials), manufacturing and marketing of PROCYSBI TM  and our drug product candidates. PROCYSBI TM  and our drug product candidates could potentially harm people or allegedly harm people and we may be subject to costly and damaging product liability claims. Many of the patients who participate in our current clinical trials and U.S. cystinosis patients who may purchase PROCYSBI TM commercially are already critically ill or suffering from chronic debilitating diseases. 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 product liability insurance, it may not be sufficient to cover future claims.

We may not be able to avoid significant liability if any product liability claim is brought against us. If a successful product liability claim is brought against us and the amount of liability exceeds our insurance coverage, we may incur substantial charges that would adversely affect our business, financial condition and results of operation.

We do not currently manufacture PROCYSBITM and RP103 and do not currently plan to develop the internal capacity to do so. We rely on a single manufacturer of the delayed release capsules as finished products of PROCYSBI TM  and RP103. 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 to commercial requirements. 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 manufacturer and key suppliers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes, severe weather events, unstable political environments at foreign facilities or financial difficulties. If this manufacturer or key suppliers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to successfully launch PROCYSBI TM , or develop or launch any other product candidate based on RP103 would be jeopardized.

In addition, we rely on one exclusive supplier for the active pharmaceutical ingredient, or API, for PROCYSBITM and RP103. While we work closely with this supplier, along with our exclusive finished goods supplier, to ensure continuity of supply while maintaining high quality and reliability, we cannot guarantee that these efforts will be successful. A reduction or interruption in our supply of API from this supplier and finished goods from our contract manufacturer, and efforts to identity and qualify alternative sources of API supply, could result in significant additional operating costs and delays in commercializing PROCYSBI TM  and in developing RP103 for HD and NAFLD. In addition, supply arrangements from alternative sources may not be available on acceptable economic terms, if at all.

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In addition, our manufacturers and suppliers are subject to the FDA’s current cGMP requirements and other FDA requirements, Drug Enforcement Administration’s regulations and other rules and regulations prescribed by non-U.S. regulatory authorities.  We depend on our third party suppliers and manufacturers for compliance with these requirements, and they may not be able to do so.  If we or our third party suppliers and manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may issue warning letters or untitled letters; seek an injunction or impose civil or criminal penalties or monetary fines; suspend or withdraw regulatory approval; suspend any ongoing clinical trials; refuse to approve pending applications or supplements to applications filed by us; suspend or impose restrictions on operations; including costly new manufacturing requirements; seize or detain products; or request that we initiate a product recall.  The occurrence of any of these regulatory actions or penalties may inhibit our ability to commercialize our product and generate revenue.

We rely on third parties for the distribution and pharmaceutical services of PROCYSBITM in the U.S.  If these third parties fail to perform under our agreements with them, it may harm our reputation and may result in reduced revenues which may harm our financial condition.

We rely on a third party logistics provider and specialty pharmacy to distribute PROCYSBITM to patients and to collect from insurance companies and government agencies in the U.S. Our ability to collect from the logistics provider is not only subject to such provider’s credit worthiness but is also dependent, in part, on its ability to arrange for full reimbursement from third party payors. The outsourcing of our distribution function is complex, and we may experience difficulties that could reduce, delay or stop shipments of PROCYSBI. If we encounter such distribution problems, and we are unable to quickly enter into a similar agreement with another specialty distributor on substantially similar terms, if at all, the distribution of PROCYSBI TM  could become disrupted, resulting in reduced revenues, healthcare provider dissatisfaction and/or patient dissatisfaction which may harm our reputation and financial condition.

Our reliance on third parties may result in delays in completing, or a failure to complete, preclinical testing, clinical trials or regulatory marketing submissions if they fail to perform under our agreements with them.

In the course of product development, we may engage or collaborate with a variety of external organizations to perform services essential to drug product development. The organizations which perform services can include, but are not limited to:

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governmental agencies, U.S. and international university laboratories;

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other biotechnology companies;

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contract manufacturing organizations;

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clinical research organizations;

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distribution and supply (logistics) service organizations;

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testing organizations;

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consultants or consulting organizations with specialized knowledge based expertise;

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intellectual property legal firms; and

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multiple other service organizations.

If we engage these organizations to help us with our product development programs, many important aspects of this process have been and will be out of our direct control. If any of these organizations we engage in the future fail to perform their obligations under our agreements with them or fail to perform in a satisfactory manner, we may face delays in completing our development and commercialization processes for any of our drug product candidates. Furthermore, any loss or 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.

Specifically, we have and will continue to 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. If third parties fail to perform or to meet the applicable standards, this will result in delays in or failures to complete trials. A failure by us or such third parties to keep to the terms of a product development program for any particular product candidate or to complete the clinical trials for a product candidate in the anticipated time frame could have significant negative repercussions on our business and financial condition.

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Our dependence on collaborative arrangements with other independent parties will subject us to a number of risks that could harm our ability to develop and commercialize products:

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collaborative arrangements might not be available on terms which are reasonably favorable to us, or at all;

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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;

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agreement terms may be difficult or costly to enforce:

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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;

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partners may choose to develop, independently or with other companies, alternative products or treatments, including products or treatments which compete with ours;

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agreements with partners may expire or be terminated without renewal, or partners may breach collaboration agreements with us;

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business combinations or significant changes in a partner's business strategy might adversely affect that partner's willingness or ability to complete its obligation to us; and

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the terms and conditions of the relevant agreements may no longer be suitable.

We cannot guarantee that we will be able to negotiate acceptable future collaboration agreements or that those currently in existence will make it possible for us to fulfill our objectives.

If we do not obtain the support of new, and maintain the support of existing, key scientific and medical collaborators, it may be difficult to develop PROCYSBI TM , RP103 and new products and establish those products as a standard of care for various indications.

We will need to establish relationships with additional key opinion leaders, leading scientists and research institutions. We believe that such relationships are pivotal to establishing products using our technologies as a standard of care for their approved indications. Although we have various medical and scientific advisors and research collaborations, there is no assurance that our advisors 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 clinical and scientific relationships to assist in our commercialization and research and development, we may not be able to successfully develop PROCYSBI TM , RP103 or our other drug product candidates.

Government health care reform could increase our costs, which could adversely affect our financial condition and results of operations.

Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. The Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, or the PPACA, is a sweeping measure intended to expand healthcare coverage within the U.S., primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program.

Several provisions of the new law, which have varying effective dates, may affect us, including our costs. For example, the PPACA increased the Medicaid rebate rate, revised the definition of "average manufacturer price" for reporting purposes, which could further increase the amount of the Medicaid drug rebates paid to states, and extended the rebate program to beneficiaries enrolled in Medicaid managed care organizations. The PPACA also expanded the 340B drug discount program (excluding orphan drugs), including the creation of new penalties for non-compliance and included a 50% discount on brand name drugs for Medicare Part D participants in the coverage gap, or "donut hole." The law also established an annual non-deductible fee on entities that sell branded prescription drugs or biologics to specified government programs in the U.S. The PPACA includes a provision to increase the Medicaid rebate for line extensions or reformulated drugs (NDA Type 3) priced higher than the original drug. Depending on the final regulations this could substantially increase our Medicaid rebate rate (in effect limiting reimbursement for these patients) if we participate in the Medicaid Rebate Program. Substantial new provisions affecting compliance also have been added, which may require us to modify our business practices with healthcare practitioners. Although the U.S. Supreme Court recently upheld most of the PPACA, it remains unclear whether there will be any changes made to certain provisions of PPACA through acts of Congress at some point in the future. In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, the President signed into law the Budget Control Act of 2011, which may result in such changes as aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. The full impact on our business of PPACA and the Budget Control Act is uncertain. We cannot predict whether other legislative changes will be adopted, if any, or how such changes would affect the pharmaceutical industry generally and specifically the commercialization of PROCYSBI TM .

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We are or may be subject to various healthcare regulations, and if we fail to comply with such regulations, we could face substantial penalties.

The laws that may affect our ability to operate as a commercial organization include:

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the federal healthcare programs' Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

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federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;

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federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

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the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;

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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; and