UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


_______________________




FORM 10-Q


_______________________




(Mark One)




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




For the quarterly period ended June 30, 2012




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 000-23776




DARA BIOSCIENCES, INC.


(Exact name of registrant as specified in its charter)


_______________________




Delaware

04-3216862(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)




8601 Six Forks Road, Suite 160

Raleigh, North Carolina

27615(Address of principal executive offices)

(Zip Code)


Registrant’s telephone number, including area code: (919) 872-5578


_______________________





(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  R    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  R    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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer      £
Accelerated filer      £
Non-accelerated filer      £

(Do not check if a smaller reporting company)
Smaller reporting company      R




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




The number of shares outstanding of the Registrant’s common stock as of August 10, 2012 was approximately 11,926,885.










Table of Contents


PagePART I - FINANCIAL INFORMATIONItem 1.
Financial Statements


3Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations


16Item 3.
Quantitative and Qualitative Disclosures about Market Risk


21Item 4.
Controls and Procedures


21PART II - OTHER INFORMATIONItem 1.
Legal Proceedings


22Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds


22Item 3.
Defaults Upon Senior Securities


22Item 4.
Mine Safety Disclosures.


22Item 5.
Other Information


22Item 6.
Exhibits


22




2


PART I - FINANCIAL INFORMATION




ITEM 1.  FINANCIAL STATEMENTS


DARA BIOSCIENCES, INC. AND SUBSIDIARIES


(a Development Stage Company)


CONSOLIDATED BALANCE SHEETS


(Unaudited)




June 30,


December 31,2012


2011AssetsCurrent assets:Cash and cash equivalents

$
8,349,244


$
1,179,157Investment-available-for-sale, at fair value


996,436



–Accounts receivable


101,448



–Prepaid expenses and other assets, current portion


245,815



283,709Total current assets


9,692,943



1,462,866Furniture, fixtures and equipment, net


49,498



42,455Restricted cash


38,564



38,554Prepaid expenses and other assets, net of current portion


43,333



77,999Prepaid license fee, net


152,245



100,000Intangible assets, net


3,108,185



–Investments


–



130,468Total assets

$
13,084,768


$
1,852,342Liabilities and stockholders’ equityCurrent liabilities:Accounts payable

$
537,223


$
640,817Accrued liabilities


335,219



140,673Accrued compensation


–



71,193Capital lease obligation, current portion


14,479



15,312Total current liabilities


886,921



867,995Deferred lease obligation


13,622



9,099Capital lease obligation, net of current portion


9,570



16,100Total liabilities


910,113



893,194Stockholders’ equity:Preferred stock, Series A, $0.01 par value, 1,000,000 shares authorized,828 shares issued and outstanding at June 30, 2012,828 issued and outstanding as of December 31, 2011.


8



8Preferred stock, Series B1, $0.01 par value, 1,000,000 shares authorized,350 shares issued and outstanding at June 30, 2012,0 shares issued and outstanding as of December 31, 2011.


4



–Preferred stock, Series B2, $0.01 par value, 1,250,000 shares authorized,6,485 shares issued and outstanding at June 30, 2012,0 shares issued and outstanding as of December 31, 2011.


65



–Common stock, $0.01 par value, 75,000,000 shares authorized,11,686,885 shares issued and outstanding at June 30, 2012,5,600,804 issued and outstanding as of December 31, 2011.


116,869



56,008Accumulated other comprehensive income, net of taxes


513,334



–Additional paid-in capital


55,096,574



40,834,972Deficit accumulated during the development stage


(43,172,945
)


(39,716,548
)Total stockholders’equity before noncontrolling interest


12,553,909



1,174,440Noncontrolling interest


(379,254
)


(215,292
)Total stockholders' equity


12,174,655



959,148Total liabilities and stockholders’ equity

$
13,084,768


$
1,852,342




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




3




DARA BIOSCIENCES, INC. AND SUBSIDIARIES


(A Development Stage Company)


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)


(Unaudited)




Three months ended June 30,


Six months ended June 30,


Period from June 22, 2002 (inception) through June 30,2012


2011


2012


2011


2012Operating expenses:Sales and marketing

$
333,026


$
-


$
408,292


$
-


$
408,292Research and development


546,215



994,458



862,051



1,390,850



26,096,552General and administrative


1,019,564



669,314



2,675,778



1,591,965



29,401,897Total operating expenses


1,898,805



1,663,772



3,946,121



2,982,815



55,906,741Loss from operations


(1,898,805
)


(1,663,772
)


(3,946,121
)


(2,982,815
)


(55,906,741
)Other income:Gain on distribution of nonmonetary asset


-



-



-



-



4,760,953Gain on sale of marketable securities


-



-



-



-



6,780,147Other income


-



-



-



-



605,462Interest income, net


3,057



2,200



3,047



2,097



842,640Other income (expense)


3,057



2,200



3,047



2,097



12,989,202Loss before undistributed loss in equity method investments


(1,895,748
)


(1,661,572
)


(3,943,074
)


(2,980,718
)


(42,917,539
)Undistributed loss in equity method investments


-



-



-



-



(2,374,422
)Net loss before benefit from income taxes


(1,895,748
)


(1,661,572
)


(3,943,074
)


(2,980,718
)


(45,291,961
)Income tax benefit


322,715



-



322,715



-



517,160Consolidated net loss


(1,573,033
)


(1,661,572
)


(3,620,359
)


(2,980,718
)


(44,774,801
)Loss attributable to noncontrolling interest


100,512



90,803



163,962



161,300



1,821,203Loss attributable to controlling interest

$
(1,472,521
)


(1,570,769
)

$
(3,456,397
)


(2,819,418
)

$
(42,953,598
)Basic and diluted net loss per common share attributable to controlling interest

$
(0.14
)

$
(0.31
)

$
(0.41
)

$
(0.57
)Shares used in computing basic and diluted net loss per common share


10,159,163



5,100,114



8,482,078



4,912,076Other Comprehensive Income:Net loss attributable to controlling interest


(1,472,521
)


-



(3,456,397
)


-



(42,953,598
)Net change in unrealized gain on investments available-for-sale


836,049



-



836,049



-



836,049Less: applicable income taxes


(322,715
)


-



(322,715
)


-



(322,715
)Total other comprehensive income

$
(959,187
)

$
-


$
(2,943,063
)

$
-


$
(42,440,264
)





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




4





DARA BIOSCIENCES, INC. AND SUBSIDIARIES


(A Development Stage Company)


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




Period FromJune 22,2002(inception)Six months ended


throughJune 30,


June 30,2012


2011


2012Operating activitiesConsolidated net loss

$
(3,620,359
)

$
(2,980,718
)

$
(44,774,801
)Adjustments to reconcile net loss to net cash used inoperating activities:Depreciation and amortization


341,692



70,733



1,042,214Income tax benefit


(322,715
)


–



(322,715
)Forgiveness of stock subscription receivable


–



–



242,500Recognition of expense related to nonmonetary asset


–



–



1,035,589Loss from equity investment


–



–



2,374,422Accretion of debt discount


–



–



406,359Share-based compensation


290,611



310,037



7,109,882Expense of warrants issued with convertible notes


–



–



4,860Expense of warrants issued to placement agent


–



–



230,920Loss on disposal of capital assets


–



–



21,440Gain on extinguishment of capital lease obligation


–



–



(12,240
)Loss on disposal of furniture, fixtures and equipment


–



–



36,065Sale of investment as payment for interest expense


–



–



36,712Distribution of investment for compensation


–



–



100,000Gain on distribution of nonmonetary asset


–



–



(4,760,953
)Gain on sale of marketable securities


–



–



(6,780,147
)Deferred lease obligation


4,523



(970
)


13,623Changes in operating assets and liabilities, net of effect of acquistions:Accounts receivable


(101,448
)


–



(101,448
)Prepaid license fee and other prepaid expenses


(51,890
)


(2,425
)


(532,961
)Accounts payable


(161,564
)


119,820



149,253Accrued liabilities


16,639



(221,173
)


(505,507
)Other liability


–



4,000



(237,548
)Net cash used in operating activities


(3,604,511
)


(2,700,696
)


(45,224,481
)Investing activitiesPurchases of furniture, fixtures, and equipment


(16,964
)


–



(216,876
)Proceeds from sale of furniture, fixtures, and equipment


–



–



5,716Issuance of notes receivable


–



–



(1,400,000
)Proceeds from sale of marketable securities


–



–



1,951,211Payments on notes receivable


–



–



711,045Cash received in the Point merger


–



–



771,671Cash received in the Oncogenerix merger


10,632



–



10,632Purchases of investments in affiliates


(29,919
)


–



(2,501,319
)Proceeds from sale of investments


–



–



4,405,692Net cash (used in) provided by investing activities


(36,251
)


–



3,737,772


The accompanying notes are an integral part of these consolidated financial statements.
  
 5




DARA BIOSCIENCES, INC. AND SUBSIDIARIES


(A Development Stage Company)


CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)




Period FromJune 22,2002(inception)Six months ended


throughJune 30,





June 30,2012


2011


2012Financing activitiesProceeds from issuance of notes payable


–



–



605,000Principal payments on notes payable


–



–



(255,000
)Repayments of capital lease obligation


(7,362
)


(6,376
)


(48,016
)Establishment of other financing


137,711



98,219



392,555Repayments on other financing


(63,458
)


(58,064
)


(309,928
)Proceeds from exercise of options and warrants


–



562,500



1,041,855Proceeds from issuance of preferred stock, common stockand warrants, net of issuance costs


10,743,968



–



48,448,051Change in restricted cash


(10
)


12,860



(38,564
)Net cash provided by financing activities


10,810,849



609,139



49,835,953Net (decrease) increase in cash and cash equivalents


7,170,087



(2,091,557
)


8,349,244Cash and cash equivalents at beginning of period


1,179,157



5,478,414



–Cash and cash equivalents at end of period

$
8,349,244


$
3,386,857


$
8,349,244Supplemental disclosure of non-cash financing activityEquipment purchased through financing

$
–


$
-


$
91,676Advances to stockholders for stock issued


–



–



1,040Payable accrued for stock issuance


–



–



350,000Note issued for stock issuance


–



–



150,000Note issued for prepaid license fee


–



–



1,000,000Note received for stock issuance


–



–



(242,500
)Stock received for consideration of outstanding loans


–



–



(427,280
)Forgiveness of stock subscription receivable


–



–



242,500Shares issued to employees & non-employee directors


147,001



118,647



826,677Shares issued to third party for services


74,210



98,363



630,909Exchange of investment for cancellation of accrued interest


–



–



36,712Exchange of investment for cancellation of note payable


–



–



500,000Conversion of note into equity of subsidiary


–



–



1,441,948
  The accompanying notes are an integral part of these consolidated financial statements.


6





DARA BIOSCIENCES, INC. AND SUBSIDIARIES


(A Development Stage Company)


CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


Six Months ended June 30, 2012




Series A

Convertible

Preferred Stock


Series B-1

Convertible

Preferred Stock


Series B-2

Convertible

Preferred Stock


Common Stock


Additional

Paid-In Capital


Deficit

Accumulated

During the

Development

Stage


Accumulated

Other

Comprehensive

Income, net of taxes


Stockholders’

Equity

(Deficit)

Before

Noncontrolling

Interest


Noncontrolling

Interest


Total

Stockholders’

EquityShares


Amount


Shares


Amount


Shares


Amount


Shares


AmountBalance at December 31, 2011


828


$
8



–


$
–


–

$
–



5,600,804


$
56,008


$
40,834,972


$
(39,716,548
)

$
-


$
1,174,440


$
(215,292
)

$
959,148Share-based compensation


–



–



–



–



–



–



–



–



216,401



–



–



216,401



–



216,401Issuance of common stock Oncogenerix merger


–



–



–



–



–



–



1,337,471



13,375



3,274,577



–



–



3,287,952



–



3,287,952Warrants issued


–



–



–



–



–



–



–



–



74,210



–



–



74,210



–



74,210Issuance of B-1 preferred stock, net of issuance costs of $139,500


–



–



1,700



17



–



–



–



–



1,194,184



–



–



1,194,201



–



1,194,201Issuance of B-1 warrants @ $1.3725


–



–



–



–



–



–



–



-



366,299



–



–



366,299



–



366,299Issuance of B-2 preferred stock, net of issuance costs of $1,066,532


–



–



–



–



10,250



103



–



-



5,151,694



–



–



5,151,797



–



5,151,797Issuance of B-2 warrants @ $1.00


–



–



–



–



–



–



–



-



2,046,473



–



–



2,046,473



–



2,046,473Issuance of B-2 warrants @ $1.25


–



–



–



–



–



–



–



-



1,985,198



–



–



1,985,198



–



1,985,198Conversion of preferred stock to common stock


–



–



(1,350
)


(13
)


(3,750
)


(38
)


4,748,610



47,486



(47,434
)


–



–



1



–



1Net loss


–



–



–



–



–



–



–



–



–



(3,456,397
)


–



(3,456,397
)


(163,962
)


(3,620,359
)Net change in unrealized gain on investments available-for-sale, net of taxes


–



–



–



–



–



–



–



–



–



–



513,334



513,334



–



513,334Balance at June 30, 2012


828


$
8



350


$
4



6,500


$
65



11,686,885


$
116,869


$
55,096,574


$
(43,172,945
)

$
513,334


$
12,553,909


$
(379,254
)

$
12,174,655




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




7




DARA BIOSCIENCES, INC. AND SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1. Basis of Presentation




The Company




DARA BioSciences, Inc. (the “Company”), headquartered in Raleigh, North Carolina is a specialty pharmaceutical company focused on the development and commercialization of oncology treatment and supportive care pharmaceutical products.  Through the acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, the Company acquired its first commercial, FDA-approved proprietary product license, Soltamox® (oral liquid tamoxifen). The Company also has an exclusive distribution agreement with Uman Pharma Inc. to commercialize gemcitabine in the U.S.  Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers.  The Company has a marketing agreement with Innocutis Holdings, LLC Company pursuant to which it will promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the oncology and radiation oncology marketplace. Bionect® is an FDA-510(k) cleared  product indicated for the management of irritation of the skin as well as first and second degree burns. Additionally, the Company continues to have an internal clinical development program focused on its drug candidate KRN5500 and is pursuing out-licensing opportunities for its DB959 program, as well as other in-licensing opportunities. The Company was incorporated on June 22, 2002.




The Company’s business is subject to significant risks consistent with specialty pharmaceutical and biotechnology companies that develop/distribute products for human therapeutic use. These risks include, but are not limited to, potential product liability, uncertainties regarding research and development, access to capital, obtaining and enforcing patents, receiving regulatory approval and competition with other biotechnology and pharmaceutical companies.




Unaudited Interim Financial Statements




The accompanying unaudited interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable Securities and Exchange Commission (“SEC”) regulations for interim financial information. These financial statements are unaudited and, in the opinion of management, include all adjustments necessary to present fairly the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows for the periods presented in accordance with GAAP. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.




Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations.




2. Summary of Significant Accounting Policies




Principles of Consolidation




The consolidated financial statements include the accounts of DARA BioSciences, Inc. and its majority-owned subsidiaries: DARA Pharmaceuticals, Inc., Point Therapeutics Massachusetts, Inc., and Oncogenerix, Inc (which are each wholly owned by the Company), and DARA Therapeutics, Inc. (which holds the Company’s assets related to its KRN5500 program and is owned 75% by the Company). The Company has control of all subsidiaries, and as such, they are all consolidated in the presentation of the consolidated financial statements. All significant intercompany transactions have been eliminated in the consolidation.




Use of Estimates




The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from those estimates.




Cash and Cash Equivalents




The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their fair value.




8




Investments




The Company accounts for its investment in marketable securities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investments – Debt and Equity Securities. See Note 3 for further information.This statement requires certain securities to be classified into three categories:




Held-to-maturity – Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost.




Trading Securities – Debt and equity securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings.




Available-for-Sale – Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity.




In accordance with FASB ASC 320, the Company reassesses the appropriateness of the classification of its investment as of the end of each reporting period. Beginning with the three month period ended June 30, 2012, the Company’s marketable securities have been classified as available-for-sale, and are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity.




Fair Value Measures




The Company utilizes FASB ASC 820, Fair Value Measurements and Disclosures, to value its financial assets and liabilities. FASB ASC 820’s valuation techniques are based on observable and unobservable inputs.  Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. FASB ASC 820 classifies these inputs into the following hierarchy:




Level 1 Inputs – Quoted prices for identical instruments in active markets.




Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.




Level 3 Inputs – Instruments with primarily unobservable value drivers.




In determining fair value, the Company utilizes techniques to optimize the use of observable inputs, when available, and minimize the use of unobservable inputs to the extent possible. As such, the Company has utilized Level 1 for the valuation of its available-for-sale investment.




The Company’s investments include investments in privately-held companies. Pursuant to FASB ASC 323, Investments – Equity Method and Joint Ventures, the Company accounts for these investments either at historical cost, or if the Company has significant influence over the investee, the Company accounts for these investments using the equity method of accounting. The Company reviews all investments for indicators of impairment at least annually, or whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. In making impairment determinations for investments in privately-held companies, the Company considers certain factors, including each company’s cash position, financing needs, earnings, revenue outlook, operational performance, management or ownership changes as well as competition.




Furniture, Fixtures and Equipment




Furniture, fixtures and equipment are recorded at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method.




Research and Development Costs




The Company expenses research and development costs as incurred.  Research and development costs include personnel and personnel related costs, costs associated with clinical trials, including amounts paid to contract research organizations and clinical investigators, clinical material manufacturing costs, process development and clinical supply costs, research costs and other consulting and professional services.




Sales and Marketing Costs




Sales and marketing costs consist of salaries, commissions, and benefits to sales and marketing personnel, marketing programs, certain promotional allowances to customers, advertising, distribution and shipping costs.




9





Amortization




Amortization is accounted for using FASB ASC 350,  Intangibles – Goodwill and Other.  Amortization reflects the period over which the asset will contribute both directly and indirectly to the expected future cash flows of the Company.  An acquired patent is amortized over the life of the patent.





Share-Based Compensation Valuation and Expense




Share-based compensation for stock and stock-based awards issued to employees and non-employee directors, is accounted for using the fair value method prescribed by FASB ASC 718, Stock Compensation,and, is recorded as a  compensation charge based on the fair value of the award on the date of grant. Share based compensation for stock and stock-based awards issued to non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments is accounted for using the fair value method prescribed by FASB ASC 505-50, Equity-Based Payment to Non-Employees,and is recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. See Note 6 for further information.




Income Taxes




The Company uses the liability method in accounting for income taxes as required by FASB ASC 740,Income Taxes.  Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry forwards and for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.  At June 30, 2012 and December 31, 2011 a valuation allowance has been recorded to reduce the net deferred tax asset to zero.




Concentration of Credit Risk




Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits.




Net Loss Per Common Share




The Company calculates its basic loss per share in accordance with FASB ASC 260, Earnings Per Share, by dividing the earnings or loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period less the weighted average unvested common shares subject to forfeiture and without consideration for common stock equivalents. Diluted loss per share is computed by dividing the loss applicable to common stockholders by the weighted-average number of common share equivalents outstanding for the period less the weighted average unvested common shares subject to forfeiture and dilutive common stock equivalents for the period determined using the treasury-stock method.  For purposes of this calculation, in-the-money options and warrants to purchase common stock and convertible preferred stock are considered to be common stock equivalents. For the six month periods ended June 30, 2012 and 2011, there have been no common stock equivalents from options, warrants or convertible preferred stock included in the calculation of diluted net loss per common share as their effect is anti-dilutive.  For the six month period ended June 30, 2011, there were 1,695,000 in-the-money warrants.  There were no other in-the-money options or warrants during either period.




Recently Issued Accounting Pronouncements




In accordance with the guidance of FASB issued in Accounting Standards Update (ASU) 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), the Company adopted the requirement to separately report its comprehensive income.  Other comprehensive income refers to revenue, expenses, gains, and losses that are recorded directly as an adjustment to shareholders’ equity. These changes became effective for the Company in the first quarter of 2012 and are reflected in the consolidated statement of operations and comprehensive income/loss. The adoption of ASU 2011-05 did not have a material impact on the Company’s financial statements.





In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). This guidance contains certain updates to the fair value measurement guidance as well as enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for “Level 3” measurements, including enhanced disclosure for: (1) the valuation processes used by the reporting entity; and (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. The provisions of this update are effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The Company’s adoption of this standard did not have a significant impact on the Company’s fair value measurements, financial condition, results of operations or cash flows.




10




3. Investments




MRI Interventions, Inc.




The Company’s marketable securities classified as available-for-sale consist of equity securities in MRI Interventions, Inc. (“MRI”), (OTBB: MRIC), formerly SurgiVision, Inc. MRI Interventions became a publicly traded company on May 18, 2012.  Prior to May 18, 2012, the Company carried the investment at cost totaling $160,387 and classified it as a long-term investment.




MRI Interventions, Inc. is developing “real-time” devices to be used with Functional MRI Technology. MRI Interventions is targeting clinical solutions in areas such as MRI-guided deep brain stimulation and cardiac ablation to treat atrial fibrillation. In 2010, MRI Interventions received 510(k) clearance from the Food and Drug Administration (FDA) to market their ClearPoint system in the United States for general neurological interventional procedures.




On February 22, 2012 the Company purchased a 10% Senior Unsecured Convertible Note from a certain investor of MRI. The note purchased by DARA converted into shares of MRI common stock on February 27, 2012, upon the effectiveness of MRI’s Form 10 registration statement filed with the SEC.  The principal amount of the note of $25,000 and accrued interest through February 27, 2012 of $4,919 converted into 29,919 shares of common stock, based on a conversion price of $1.00 per share.




As of June 30, 2012, the fair value of the Company’s investment in MRI was $996,436. Unrealized holding gains, net of tax, on available-for-sale securities were $513,334 for the period ending June 30, 2012.  There was no unrealized gain or loss for the period ending June 30, 2011.




4. Fair Value




Assets measured at fair value on a recurring basis consisted of the following instrument as of June 30, 2012:





Quoted Prices in Active Markets for Indentical Instruments


Significant Other Observable Inputs


Significant Unobservable InputsTotal


Level 1


Level 2


Level 3Assets:Investment in MRI Internventions, Inc.

$
996,436


$
996,436


$
-


$
-Total

$
996,436


$
996,436


$
-


$
-




5.  Merger




On January 17, 2012, the Company merged with Oncogenerix, Inc, as a result of which Oncogenerix became a wholly-owned subsidiary of DARA.  Oncogenerix is a specialty pharmaceutical company which is focused on the identification, development and commercialization of branded and generic oncology pharmaceutical products. The Directors of DARA believed the acquisition of Oncogenerix and the rights to Soltamox® leveraged DARA's existing cancer drug development program and provided DARA with the possibility of generating near term revenue, as well as establishing a commercial platform whereby other cancer and cancer-support products may be accessed in the future through pending Oncogenerix licensing efforts. As part of its strategy, the Company has also targeted generic injectable cytotoxics, where products are losing patent protection. Generic cytotoxics, cancer-support products and other product licensing opportunities, along with DARA's existing proprietary development pipeline, will be the basis of the Company's long-term product portfolio.




The Merger was accounted for as an acquisition under the purchase method of accounting for business combinations in accordance with FASB ASC 805, Business Combinations. DARA agreed to acquire Oncogenerix for approximately $3,287,952 in stock payable at closing and additional shares of stock in the future if certain contingent milestones are achieved (the “transaction price”). 1,114,559 restricted shares of common stock (equal to 19.9 percent of DARA’s common stock outstanding) were issued to the Oncogenerix stockholders as of the closing date of January 17, 2012. 167,184 of these shares were deposited into an escrow account and held for offset against possible indemnification claims against the sellers.  Up to an additional 1,114,560 shares could be issued over a period of up to 60 months following the closing date (‘contingent merger consideration shares”). The issuanceof the contingent merger consideration shares was based on the achievement of certain financial milestones related to sales or market capitalization or upon a change of control during the contingent earn out period. On May 15, 2012 the Company’s Board of Directors determined the Company had achieved one of the specified milestones and 222,912 of these shares were issued.




11




In accordance with the provisions of FASB ASC 805, the purchase price allocation for the acquisition as set forth in the table below reflects various preliminary fair value estimates and analyses, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair values of the Soltamox intangible asset, evaluation of other intangible assets acquired, income taxes, and residual goodwill.  We expect to continue to obtain information to assist us in determining the fair value of net assets acquired at the acquisition date during the measurement period. The following is the allocation of the purchase price:





Cash

$
10,632Other assets


550Soltamox license


3,367,201Accounts payable


(57,970
)Accrued liabilities


(32,461
)Total purchase price

$
3,287,952


The Company is amortizing the Soltamox license over the estimated useful life of seventy-eight months on a straight line basis, beginning with January 2012.




6.  Stockholders’ Equity




On April 6, 2012, the Company entered into a Securities Purchase Agreement with certain investors in connection with a registered public offering by the Company of 10,250 shares of the Company's Series B-2 convertible preferred stock (which are convertible into a total of 10,250,000 shares of common stock) and warrants to purchase up to 5,125,000 shares of the Company's common stock at an exercise price of $1.00 per share and warrants to purchase up to 5,125,000 shares of the Company's common stock at an exercise price of $1.25  per share, for gross proceeds of approximately $10.3 million. The closing of the sale of these securities took place on April 12, 2012 for net proceeds of approximately $9.2 million.




Shares of Series B-2 preferred stock have a liquidation preference equal to $1,000 per share and, subject to certain ownership limitations, are convertible at any time at the option of the holder into shares of the Company's common stock at a conversion price of $1.00 per share. The Series B-2 warrants represent the right to acquire shares of common stock at an exercise price of $1.00 per share and $1.25 per share and will expire on April 12, 2017.  During the six month period ended June 30, 2012, 3,765 Series B-2 Preferred shares were converted into 3,765,000 shares of common stock.




In the event that the Company issues or sells any additional shares of common stock at a price per share less than the then-applicable conversion price, then the conversion price upon each such issuance shall be reduced to that lower price at which shares have been issued or sold.  Certain common stock issuances at less than the then applicable conversion price require the approval of the holders of at least 67% of the then outstanding Series B-2 warrants.




Management evaluated the terms and conditions of the embedded conversion features based on the guidance of FASB ASC 815 to determine if there was an embedded derivative requiring bifurcation. Management concluded that the embedded conversion feature of the preferred stock was not required to be bifurcated because the conversion feature is clearly and closely related to the host instrument.




Management determined that there were no beneficial conversion features for the Series B-2 convertible preferred stock because the effective conversion price was equal to or higher than the fair value at the date of issuance.




As a result of the Merger on January 17, 2012, 1,114,559 shares of DARA common stock were issued to former Oncogenerix stockholders. In addition to the initial shares the Oncogenerix stockholders will, subject to the approval of at least a majority of the issued and outstanding shares of DARA common stock, be entitled to receive up to an additional 1,114,560 shares of DARA common stock based upon the combined company's achievement of certain revenue or market capitalization milestones during the 60 months following the Closing Date.  On May 15, 2012, 222,912 of these contingent shares were issued.




On January 17, 2012, the Company entered into a Securities Purchase Agreement with an institutional investor in connection with a registered direct offering by the Company of 1,700 shares of the Company's Series B-1 convertible preferred stock (which are convertible into a total of 1,238,616 shares of common stock) and warrants to purchase 619,308 shares of the Company's common stock, for gross proceeds of $1.7 million. The closing of the sale of these securities took place on January 20, 2012 for net proceeds of approximately $1.5 million.




12




Shares of Series B-1 preferred stock have a liquidation preference equal to $1,000 per share and, subject to certain ownership limitations, are convertible at any time at the option of the holder into shares of the Company's common stock at a conversion price of $1.3725 per share. The B-1 warrants represent the right to acquire shares of common stock at an exercise price of $1.31 per share and will expire on January 20, 2017.  During the three and six month periods ended June 30, 2012, no and 1,350 Series B-1 Preferred shares were converted into 983,610 shares of common stock.




In January 2011, two investors who participated in the December 2010 Series A convertible preferred stock or warrant investment round exercised 225,000 warrants at $2.50 per warrant. No Series A convertible preferred stock and warrants were converted for the three and six month periods ended June 30, 2012. For the three and six month periods ended June 30, 2011, 870 Series A Preferred shares were converted into 348,000 shares of common stock and 1,770 Series A Preferred shares were converted into 708,000 shares of common stock, respectively.




7.  Share-based Compensation




Effective with the adoption of FASB ASC 718, Compensation-Stock Compensation, the Company has elected to use the Black-Scholes option pricing model to determine the fair value of options granted. Share price volatility is based on an analysis of historical stock price data reported for a peer group of public companies. The expected life is the length of time options are expected to be outstanding before being exercised. The Company estimates expected life using the “simplified method” as allowed under the provision of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, Share-Based Payment. The simplified method uses an average of the option vesting period and the option’s original contractual term. The Company uses the implied yield of U. S. Treasury instruments with terms consistent with the expected life of options as the risk-free interest rate. FASB ASC 718 requires companies to estimate a forfeiture rate for options and accordingly reduce the compensation expense reported. The Company used historical data among other factors to estimate the forfeiture rate.




There were 475,000 and 535,000 options granted to employees during the three and six month periods ended June 30, 2012, respectively.  There were no options granted to employees during the three and six month periods ended June 30, 2011.  There were 50,000 options granted to each of the four non-employee directors during the three month period and 210,000 options granted to the non-employee directors during the six month period ended June 30, 2012. There were 5,000 options granted to each of the three non-employee directors during the three and six month periods ended June 30, 2011. The fair value of options granted to employees and non-employee directors for the six month period ended June 30, 2012 was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:




Six months ended

June 30, 2012Expected dividend yield


-
%Expected volatility


113
%Weighted-average expected life (in years)


5.8Risk free interest rate


0.98
%Forfeiture rate


10
%


The Company’s consolidated statements of operations for the three and six month periods ended June 30, 2012 and 2011, respectively, include the following share-based compensation expense related to issuances of stock options to employees and non-employee directors as follows:




Three months ended June 30,


Six months ended June 30,2012


2011


2012


2011Research and development

$
11,475


$
5,638


$
13,179


$
11,212Sales and marketing


55,178



-



69,400



-General and administration


102,281



47,216



133,822



80,070Total stock-based compensation to employeesand non-employee directors

$
168,934


$
52,854


$
216,401


$
91,282





In January 2011, the Company issued 66,000 shares of restricted stock to five employees which vested on the one year anniversary of the grant date. The Company recognized $49,598 and $6,841 stock-based compensation expense in general and administrative and research and development, respectively, during the three month period ended June 30, 2011. The Company recognized $98,652 and $13,607 shared-based compensation expense in general and administrative and research and development, respectively, during the six month period ended June 30, 2011. There was no restricted share-based compensation expense for employees during the three and six month periods ended June 30, 2012.




13




On January 4, 2010, the Company issued 625 shares of restricted stock to each of two non-employee members of the board which vested one year from the date of issue, January 4, 2011.  On February 9, 2010 the Company issued 208 shares of restricted stock to a non-employee member of the board which vested on January 4, 2011. As of June 30, 2011 all restricted stock issued to non-employee members of the board are vested. The Company recognized share-based compensation expense related to issuance of restricted stock to certain members of the board of directors in general and administrative expense of none and $6,388 for the three and six month periods ended June 30, 2011. There was no share-based compensation expense for non-employee members of the board for the three and six month periods ended June 30, 2012.




The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505 Equity, using a fair-value approach. The equity instruments, consisting of shares of restricted stock, stock options and warrants granted to lenders and consultants, are valued using the Black-Scholes valuation model. Measurements of share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and are recognized as an expense over the term of the related financing or the period over which services are received.




There was no share-based compensation related to issuance of shares of restricted stock to non-employees (i.e. consultants) in exchange for services during the three and six month periods ended June 30, 2012.  The Company recognized $98,613 share-based compensation related to issuance of shares of restricted stock to non-employees (i.e. consultants) in exchange for services during the three and six month periods ended June 30, 2011.  The Company recognized $44,526 and $74,210 share-based compensation related to issuance of 150,000 warrants at an exercise price $1.50 to non-employees (i.e. consultants) in exchange for services during the three and six month periods ended June 30, 2012,  respectively and no expense during the same periods in 2011. The Company recognized no share-based compensation expense related to issuance of stock options to non-employees (i.e. consultants) in exchange for services in general and administrative expense for the three and six month periods ended June 30, 2012 and expense of $763 and $1,495 for the three and six month periods ended June 30, 2011, respectively.




Unrecognized share-based compensation expense, including time-based options and, performance-based options expected to be recognized over an estimated weighted-average amortization period of 3.3 years was $375,254 at June 30, 2012 and over an estimated weighted-average amortization period of 1.13 years was $166,552 at June 30, 2011.




A summary of activity under the Company’s stock option plans for the three months ended June 30, 2012 is as follows:




Options OutstandingWeightedShares


Number of


AverageAvailable

Shares


Exercisefor Grant

Outstanding


PriceBalance at December 31, 2011


86,421



1,028,848


$
3.052008 Stock Plan increase


292,950



-



-Options granted


(70,000
)


70,000



1.41Options forfeited


43,750



(43,750
)


6.40Balance at March 31, 2012


353,121



1,055,098



2.802008 Stock Plan increase


586,879



-



-Options granted


(675,000
)


675,000



1.00Balance at June 30, 2012


265,000



1,730,098


$
2.10




14




8.  Commitments and Contingencies




From time to time, the Company is exposed to various claims, threats, and legal actions in the ordinary course of business. Management was aware of no such material matters as of the date of these financial statements.




9. Income Taxes




As of June 30, 2012, the Company has losses from continuing operation and other comprehensive income related to its available for sale securities.  The Company has allocated income tax (benefit) to continuing operations and other comprehensive income based on the provision of FASB ASC 740. Accordingly, the Company has recognized an income tax benefit in continuing operations of $322,715.  The income tax benefit is offset by the income tax expense recognized in other comprehensive income.   The Company did not record any current tax expense in the three and six month periods ended 2011. The Company is not subject to examination for tax periods prior to 2007 in state and federal jurisdictions.




The Internal Revenue Code provides limitations on utilization of existing net operating losses and tax credit carryforwards against future taxable income based upon changes in share ownership. If these changes have occurred, the ultimate realization of the net operating loss and R&D credit carryforwards could be permanently impaired.




10. Subsequent Events




The Company has no material subsequent event to the Company’s Form 10-Q for the quarter ended June 30, 2012 requiring disclosure.




15





ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011, which has been filed with the Securities and Exchange Commission (the “SEC”).




This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  When used in this Form 10-Q, the words “believe,” “anticipates,” “intends,” “plans,” “estimates,” and similar expressions are forward-looking statements.  Such forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to factors that could cause actual results to differ materially for us from those projected.  Those factors include risks and uncertainties relating to our current cash position and our need to raise additional capital in order to be able to continue to fund our operations, the potential delisting of our common stock from the NASDAQ Capital Market, the potential stockholder dilution that may result from the reset provisions of the Series B-2 preferred stock and from future capital raising efforts, restrictive covenants in agreements from prior financing transactions may restrict or prohibit our ability to raise additional capital on terms favorable to the Company and its current stockholders, our limited operating history which may make it difficult to evaluate our business and future viability, our ability to retain our managerial personnel and to attract additional personnel, our ability to timely commercialize and generate revenues or profits from Bionect®, Soltamox® or other products given that DARA only recently hired its initial sales force, our ability to successfully integrate Oncogenerix, any revenue we generate will come from a small group of commercialized products, our ability to successfully develop and out-license our drug candidates as anticipated, the current regulatory environment in which we develop and sell our products, the market acceptance of those products, dependence on partners and third-party manufacturers, successful performance under collaborative and other commercial agreements, potential product liability risks that could exceed our liability coverage, potential risks related to healthcare fraud and abuse laws, competition from other pharmaceutical companies, biotechnology companies and other research and academic institutions, the strength of our intellectual property, the intellectual property of others and other risk factors identified in the documents we have filed, or will file, with the SEC.  We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as  result of various factors, including, among others, the potential risks and uncertainties described in the Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of our Annual Report on Form 10-K for the year ended December 31, 2011 and in any subsequently filed Quarterly Reports on Form 10-Q. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC.  Except as required by law, we undertake no obligation to update any forward-looking statements.




Overview




We are a North Carolina-based specialty pharmaceutical company focused on the development and commercialization of oncology treatment and supportive care pharmaceutical products.  Through our acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, we acquired exclusive U.S. marketing rights to our first commercial proprietary product, Soltamox® (oral liquid tamoxifen).  Soltamox® has been approved by the U.S. Food and Drug Administration (“FDA”) for the treatment of breast cancer.  We also have an exclusive distribution agreement with Uman Pharma Inc. to commercialize gemcitabine in the U.S.  Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers.  In addition, we have a marketing agreement with Innocutis Holdings, LLC pursuant to which we will promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the oncology and radiation oncology marketplace.  Bionect® has been 510(k) cleared by the FDA for the management of irritation of the skin as well as first and second degree burns. Additionally, we continue to have an internal clinical development program focused on our drug candidate KRN5500 for the treatment of neuropathic pain in cancer patients and are pursuing out-license opportunities for DB959 for the treatment of metabolic diseases including type 2 diabetes.




In our sales and marketing efforts we will employ a multi-disciplinary approach to reach and educate health care providers, dispensers, patient advocacy groups, foundations, caregivers and patients directly. We believe we can accomplish this through utilization of a combination of our own specialized sales organization and independent sales representatives, innovative marketing programs, partnerships with specialty pharmacy providers, working with patient advocacy groups and foundations as well as collaborative arrangements with third party sales organizations.




In our internal development program, we contract with and manage outsource partners to complete the necessary development work.  This permits us to avoid incurring the cost of buying or building laboratories, manufacturing facilities or clinical research operation sites and allows us to control our annual expenses and to optimize our resources.




16




In order to successfully achieve our goals, having sufficient liquidity is important since we do not currently have a recurring sales or revenue stream to provide such working capital. We have not generated any revenue from operations to date.  We have liquidated or distributed to our stockholders some of our investments made in other companies.  Our primary source of working capital has been from the proceeds of investments made in other companies as well as capital raised from the sale of our securities.  From inception through June 30, 2012, we have received net proceeds from the sale of marketable securities assets in the amount of $1,951,211, $4,405,692 in net proceeds from sale of investments in affiliates and we have raised $48,448,051 from issuance of preferred stock, common stock, and warrants, net of issuance costs.




We expect to continue to incur operating losses in the near-term.  Our results may vary depending on many factors, including the success of our building a successful sales and marketing organization, our ability to properly anticipate customer needs and obtain timely regulatory approvals, as well as the clinical results of our KRN5500 program and the progress of licensing activities of our other drug compounds with pharmaceutical partners.




Product Commercialization and Development




While in the past we had a broad range of drug development programs, currently our primary focus is on the development and commercialization of the following types of oncology treatment and supportive care pharmaceutical products:




●
Soltamox®, an FDA-approved liquid formulation of tamoxifen and other liquid formulation products;




●
Gemcitabine and other generic sterile injectable cytotoxic products; and




●
Cancer support therapeutics, including Bionect®, an FDA 510(k) cleared product for the management of irritation of the skin as well as first and second degree burns.




Oral liquid formulations of FDA approved products




Oral liquids can effectively provide an attractive alternative to solid dose formulations for those patients with dysphagia, or difficulty swallowing, or who simply prefer to take drug products in liquid form. Dysphagia is a condition that exists in a portion of the population, particularly the elderly. Those suffering from dysphagia often have difficultly or experience pain when using oral tablet or capsule products and can benefit greatly from liquid formulations of drugs. In addition, breast cancer patients receiving chemotherapeutic agents are subject to severe oral mucositis, which makes liquid medical formulations preferable.




Soltamox®




Soltamox® (oral liquid tamoxifen), our first proprietary, FDA approved product, is a drug primarily used to treat breast cancer.  Soltamox® will be the only liquid formulation of tamoxifen available for sale in the United States.  As a result of our acquisition of Oncogenerix, we became party to an exclusive license and distribution agreement with Rosemont Pharmaceuticals, Ltd., a U.K. based manufacturer, for rights to market Soltamox® in the United States.  Currently, Soltamox® is marketed only in the U.K. and Ireland by Rosemont Pharmaceuticals, Ltd.  Soltamox® is the subject of a U.S. issued patent which expires in June 2018.  We expect to begin actively marketing and selling Soltamox® in the U.S. in the second half of 2012.




Generic sterile injectable cytotoxic products




We are also focusing on the development and commercialization of generic sterile injectable cytotoxic products. Many cytotoxics have recently lost patent protection or are scheduled to shortly lose such patent protection. We plan to partner with sterile injectable product manufacturers who have the expertise and capability to provide a finished product from FDA inspected and approved facilities. Currently, the FDA review and approval process for generic products is taking on average approximately 36 months.




Gemcitabine




In February 2012, we entered into an Exclusive Distribution Agreement with Uman Pharma Inc. pursuant to which we received an exclusive license to import, sell, market and distribute Uman’s gemcitabine lyophilized powder product in 200mg and 1g dosage sizes in the U.S.  Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers.  Uman plans to file an Abbreviated New Drug Application for gemcitabine with the FDA in the second half of 2012.




Cancer support therapeutics




We are also focusing on the development and commercialization of cancer support therapeutics.




17




Bionect®




On March 23, 2012, we entered into an Exclusive Marketing Agreement with Innocutis Holdings, LLC pursuant to which we will promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the oncology and radiation oncology marketplace.  Bionect® has been approved by the FDA for the management of irritation of the skin as well as first and second degree burns. Bionect®is currently being promoted and sold by Innocutis in the dermatology market.   The Company will be compensated by Innocutis for each unit sold in the oncology and radiation oncology market.  The Company began marketing and selling Bionect® in the U.S. in the second quarter of 2012 and expects revenues resulting from sales of Bionect® in the second half of 2012.




Internal Drug Candidates




DARA had two internal drug candidates in clinical development prior to the acquisition of Oncogenerix in January 2012.




●
KRN5500, a cancer support product for the treatment of neuropathic pain in cancer patients; and




●
DB959, a first-in-class drug candidate for the treatment of type 2 diabetes and dyslipidemia.




KRN5500




KRN5500 is a novel, non-narcotic/non-opioid intravenous product for the treatment of neuropathic pain in patients with cancer. The drug has successfully completed a Phase 2a proof of concept study in patients with end-stage cancer and analgesia-resistant neuropathic pain where it showed statistically-significant pain reduction versus placebo (p = 0.03) using standardized pain test scores. There were no major safety concerns. The FDA has designated KRN5500 a Fast Track drug, based on its potential usefulness in treating a serious medical condition and in fulfilling an unmet medical need. We are working with the National Cancer Institute (NCI) to design an additional clinical trial under joint DARA-NCI auspices. Since KRN5500 would complement our portfolio of oncology treatment and supportive care pharmaceuticals we are considering further internal Phase 2 development to a potential ex-US partnering point, while retaining the US market opportunity.




We incurred $133,457 and $157,685in development costs associated with the development of KRN5500 during the three and six month periods ended June 30, 2012, respectively and we have incurred third party costs of $4,930,900from inception to date.




DB959




DB959 comes from a family of PPAR alpha/delta/gamma agonists licensed from Bayer Pharmaceuticals Corporation. DB959 is a first-in-class, small molecule, non-TZD PPAR delta/gamma agonist for the treatment of diabetes and hyperlipidemia. The drug activates genes involved in the metabolism of sugars and fats, thereby improving the body’s ability to regulate both aspects of diabetes. DB959 has successfully completed Phase 1 trials, in which it demonstrated a good safety profile even when dosed at approximately 10 times the anticipated human dose. In addition, the drug has a pharmacokinetic profile which appears to support once-a-day oral dosing. Our review of non-clinical studies in models predictive of human disease indicates that DB959 provides glucose control and increases (good) HDL cholesterol better than rosiglitazone (Avandia) with less weight gain. DB959 is targeted for out-licensing to partners more able to sustain the prolonged time-lines and significant costs involved in diabetes drug development.




We incurred $25,081 and $101,250in development costs associated with DB959 during the three and six month periods ended June 30, 2012, respectively and we have incurred costs of $7,547,928from inception to date.




Pre-clinical Drug Candidate Programs Available for Out-license Opportunities




We also have families of patents covering additional PPAR agonists and DPPIV inhibitors, with potential applications in the areas of diabetes, metabolic and inflammatory disease. We are currently evaluating partnering and other opportunities to maximize the potential commercial value of these assets.




DB900 comprises a series of compounds which are PPAR gamma/alpha/delta agonists.  We did not incur costs during the three and six month periods ended June 30, 2012, for the development of DB900 series compounds; we have incurred costs of $129,272 from inception to date.




DB160 is a dipeptidylpeptidase (DPPIV)  inhibitor for the treatment of type 2 diabetes.  We incurred $6,006 and $10,880 of patent costs for the development of DB160 during the three and six month periods ended June 30, 2012, respectively, and we have incurred costs of $2,385,717 from inception to date.




The DB200 program has been on hold since 2009 due to internal capital constraints.  Since 2009, the only expenditure has been to maintain intellectual property support for the series of compounds which served as early leads.  We have decided to discontinue further expenditure in the DB200 program, due to its early stage of research and the low likelihood of success.  Discontinuing DB200 is consistent with our new focus in oncology and supportive-care products and commercial-stage investments.




18





Critical Accounting Policies and Significant Judgments and Estimates




Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods.  On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical trial expenses, stock-based compensation and asset impairment and significant judgments and estimates.  We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.




Research and Development Expenses




We expense research and development expenses when incurred.  The cost of certain research programs, such as patient recruitment and related supporting functions for clinical trials, are based on reports and invoices submitted by the contract research organization (“CRO”) assisting us in conducting the clinical trial.  These expenses are based on patient enrollment as well as costs consisting primarily of payments made to the CRO, clinical centers, investigators, testing facilities and patients for participating in our clinical trials.  Certain research and development costs must be prepaid which, if the research and development work ceases to progress for whatever reason, are not refundable to us.  In such cases, those costs are expensed when paid.




Accrued Expenses




As part of the process of preparing financial statements, we are required to estimate accrued expenses.  This process involves reviewing open contracts and purchase orders, communicating with applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when invoices have not yet been sent and we have not otherwise been notified of actual cost.  The majority of our service providers invoice monthly in arrears for services performed.  We make estimates of accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us.  We periodically confirm the accuracy of our estimates with the service providers and makes adjustments if necessary.  Examples of estimated accrued expenses include:




●
fees paid to CROs in connection with preclinical and toxicology studies and clinical trials;




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fees paid to investigative sites in connection with clinical trials;




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fees paid to contract manufacturers in connection with the production of raw materials, drug substance and drug products; and




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professional service fees.




Share-Based Compensation




Share-based compensation is accounted for using the fair value based method prescribed by Financial Accounting Standards Board Accounting Standards Codification 718, Compensation-Stock Compensation.  For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award.  For transactions with non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance.  Our Company’s share-based compensation transactions for employees and non-employee directors resulted in compensation expense of $168,934 and $109,293 for the three month period ended June 30, 2012 and 2011, respectively, and $216,401 and $209,929 for the six month period ended June 30, 2012 and 2011, respectively. The Company recognized stock-based compensation expense for awards to consultants for services totaling $44,526 and $763 for the three month period ended June 30, 2012 and 2011, respectively, and $74,210 and $99,858 for the six month period ended June 30, 2012 and 2011, respectively.




Carrying Value of Property and Equipment and the Value of Certain Liabilities




The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at our balance sheet date.  Such estimates include the carrying value of property and equipment and the value of certain liabilities.  Actual results may differ from such estimates.




19




Results of Operations




Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011




The Company incurred sales and marketing expense of $333,026 in the three months ended June 30, 2012 as a result of its merger with Oncogenerix and the costs incurred in establishment of a sales and marketing infrastructure to support the promotion of Bionect® and to prepare for the launch of Soltamox® in the second half of the year. As of June 30, 2012 sales and marketing costs consist of salaries, and benefits to sales and marketing personnel, marketing programs, and distribution costs.  Prior to the merger the Company had no commercial activities.




Research and development expenses decreased $448,243 from $994,458for the three months ended June 30, 2011  to $546,215for the corresponding 2012 period, as a result of the Company’s decision to focus on the KRN5500 program and to pursue out-license opportunities for the DB959 program, which resulted in decreasing development costs for DB959.




General and administrative expenses consist primarily of salaries and benefits, professional fees related to administrative, finance, human resource, legal and information technology functions.  In addition, general and administrative expenses include allocated facility, basic operational and support costs and insurance costs.  General and administrative expenses increased $350,250 from $669,314for the three months ended June 30, 2011 to $1,019,564for the corresponding 2012 period, primarily as a result of expenses associated with our increase in investor relations activities, additional compensation expense, and non-cash amortization expense of the Soltamox® license of $129,508, Bayer license of $30,000 and Uman license of $7,653 for the three month period ended June 30, 2012 and non-cash depreciation of $9,921 .




Other income (expense), net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations.  Other (expense) income was minimal for the three months ended June 30, 2012 and 2011.




Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011




The Company incurred sales and marketing expense of $408,292 as a result of its merger with Oncogenerix and the costs incurred in establishment of a sales and marketing infrastructure to support the promotion of Bionect and to prepare for the launch of Soltamox in the second half of the year. Prior to the merger the company had no commercial activities.




Research and development expenses decreased $528,799 from $1,390,850for the six months ended June 30, 2011 to $862,051for the corresponding 2012 period, as a result of the Company’s decision to focus on the KRN5500 program and to pursue out-license opportunities for the DB959 program, which resulted in decreasing development costs for DB959.




General and administrative expenses increased $1,083,813 from $1,591,965for the six months ended June 30, 2011 to $2,675,778for the corresponding 2012 period, primarily as a result of expenses associated with our increase in investor relations activities, additional compensation expense, and non-cash amortization expense of the Soltamox® license of $259,016, Bayer license of $60,000 and Uman license of $12,755.




Other income (expense), net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations.  Other income (expense), net increased $950 from an income of $2,097for the six months ended June 30, 2011 to an income of $3,047for the corresponding 2012 period.




Liquidity and Capital Resources




Overview




From inception through June 30, 2012, we have financed our operations primarily from the net proceeds of (1) registered direct offerings and private placements of equity securities, through which we raised $48,448,052 in net proceeds, and (2) the sale of securities we held in subsidiary companies and marketable securities, through which we raised $6,356,903.




At June 30, 2012, our principal sources of liquidity were our cash and cash equivalents which totaled $8,349,244. As of June 30, 2012, we had net working capital of $8,806,022.  Our cash resources have been used to acquire licenses, and to fund research and development activities, capital expenditures, sales and marketing and general and administrative expenses.




20




Cash Flows




Our cash used in operating activities for the six months ended June 30, 2012 compared to our cash used in operating activities for the six months ended June 30, 2011 increased by $903,815, primarily due to the increase in consolidated net loss of $639,641 which was driven primarily by the increases in sales and marketing expenses of $408,292 and increases in general and administrative expenses of $1,083,813 offset by a decrease in research and development expenses of $528,799, as explained above. Our net cash used in investing activities during the six months ended June 30, 2012 was $36,251 which consisted of purchases of furniture and fixtures of $16,694, as well as an investment in MRI Interventions Inc. of $29,919, offset by cash received from the Oncogenerix merger of $10,632.  There was no cash used in investing activities during the same period in 2011.




Our net cash provided by financing activities for the six months ended June 30, 2012 compared to our net cash provided by financing activities for the six months ended June 30, 2011 increased by $10,201,710 primarily due to the issuances of preferred stock which generated net proceeds of $10,743,968 while during the same period in 2011, we had only $562,500 in receipts from the exercise of options and warrants.




Financial Condition




We believe we have sufficient working capital to continue our operations through the first six months of 2013.  However, we expect to require additional investment capital to pursue our business plan.  Our capital requirements will depend upon numerous factors, including our ability to generate revenue through our sales and marketing efforts the extent to which we incur additional costs in building our portfolio of products and creating a sales organization and the extent to which we pursue our research and development programs.




Off-Balance Sheet Arrangements




We had no off-balance sheet arrangements as of June 30, 2012.




On May 21, 2012, we received a notification letter from the Listing Qualifications Department of The NASDAQ Stock Market indicating that, for the last 30 consecutive business days, the bid price for the Company’s common stock has closed below the minimum $1.00 per share requirement for continued listing on The Nasdaq Capital Market under Marketplace Rule 5550(a)(2). In accordance with Marketplace Rule 5550(a)(2), the Company has 180 calendar days, or until November 19, 2012, to regain compliance with the minimum $1.00 price per share requirement. To regain compliance, anytime before November 19, 2012, the bid price of the Company’s common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. NASDAQ’s notification letter has no effect on the listing of the Company’s common stock at this time.




ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Not applicable.
  ITEM 4.  CONTROLS AND PROCEDURES
  Evaluation of Disclosure Controls and Procedures
  As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer and Acting Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Acting Chief Financial Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in Securities and Exchange Commission rules and forms and that material information relating to the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.
  Changes in Internal Control Over Financial Reporting
  During the second quarter of 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
  21
  PART II - OTHER INFORMATION
  ITEM 1.  LEGAL PROCEEDINGS
  As of August 14, 2012, we had no outstanding material legal proceedings.
  ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Not applicable.
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
  Not applicable.
  ITEM 4.  MINE SAFETY DISCLOSURES.
  Not applicable.
  ITEM 5.  OTHER INFORMATION
  Not applicable.
  ITEM 6.  EXHIBITS
  The exhibits required to be filed as a part of this report are listed in the Exhibit Index.
  22
  SIGNATURES
  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 2012.
  DARA BIOSCIENCES, INC.Date: August 14, 2012
By:
/s/ David J. Drutz, M.D.David J. Drutz, M.D.Chief Executive Officer
  Date: August 14, 2012
By:
/s/ David L. TousleyDavid L. TousleyActing Chief Financial Officer
 
 23
 
 EXHIBIT INDEX
  Exhibit No.

Description

Incorporated by Reference to10.1

Form of Securities Purchase Agreement

Incorporated by reference to the Company’s Report on Form 8-K filed on April 9, 201210.2

Placement Agent Agreement, dated April 6, 2012 by and between DARA BioSciences, Inc. and Ladenburg Thalmann & Co. Inc.

Incorporated by reference to the Company’s Report on Form 8-K filed on April 9, 201210.3

Consulting Agreement, dated June 1, 2012 by and between DARA BioSciences, Inc. and David L. Tousley, doing business as Stratium Consulting Services.10.4

Amendment No. 1 to DARA Biosciences, Inc. 2008 Employee, Director and Consultant Stock Plan31.1

Certification of David J. Drutz, M.D.. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 14, 201231.2

Certification of David L. Tousley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 14, 201232

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August14, 2012