UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  FORM
10-Q
  
  (Mark
One)
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For
the quarterly period ended September 30, 2008
  o 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 incorporation or organization)
              (I.R.S. Employer
      Identification No.)
   8601
      Six Forks Road, Suite 160Raleigh,
      North Carolina
              27615(Address of
      principal executive offices)
              (Zip
      Code)
  (919)
872-5578
 ( Registrant’s
telephone number, including area code)
  Securities
registered pursuant to Section 12(b) of the Act: Common
Stock, Par Value $01 Per Share
  Securities
registered pursuant to Section 12(g) of the Act: None
  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 xNo o
  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 o
                Accelerated
      filer oNon-accelerated
      filer o
                Smaller
      reporting company x(Do not check
      if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes oNo x




The
number of shares outstanding of the Registrant’s common stock as of November 12,
2008 was approximately 29,500,998


Table of Contents
  Table of
Contents
  PagePART
      I - FINANCIAL INFORMATIONItem
      1.
                Financial Statements
                3Item
      2.
                Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                14Item
      3.
                Quantitative and Qualitative Disclosures about Market
      Risk
                20Item
      4.
                Controls and Procedures
                20PART
      II - OTHER INFORMATIONItem
      1.
                Legal Proceedings
                21Item
      2.
                Unregistered Sales of Equity Securities and Use of
      Proceeds
                21Item
      3.
                Defaults Upon Senior Securities
                21Item
      4.
                Submission of Matters to a Vote of Security
      Holders
                21Item
      5.
                Other Information
                21Item
      6.
                Exhibits
                21
 Table of Contents
  PART I - FINANCIAL INFORMATION
  Item 1. Financial Statements
  DARA
BIOSCIENCES, INC.
 (A
Development Stage Company)
 CONSOLIDATED
BALANCE SHEETS
 (Unaudited)
  September 30,
                    2008
                  
                  
                  December 31,
                    2007AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  1,089,594
                  
                  
                  $
                  8,263,006Interest
      receivable
                  
                  
                  -
                  
                  
                  
                  44,439Prepaid
      expenses and other current assets
                  
                  
                  442,674
                  
                  
                  
                  34,648Investment
      securities available for sale
                  
                  
                  1,628,408
                  
                  
                  
                  -Total
      current assets
                  
                  
                  3,160,676
                  
                  
                  
                  8,342,093Furniture,
      fixtures, and equipment, net
                  
                  
                  108,000
                  
                  
                  
                  60,299Prepaid
      license fee, net
                  
                  
                  490,000
                  
                  
                  
                  580,000Deferred
      stock issuance costs
                  
                  
                  47,760
                  
                  
                  
                  -Investments
                  
                  
                  222,479
                  
                  
                  
                  222,879Total
      assets
                  
                  $
                  4,028,915
                  
                  
                  $
                  9,205,271Liabilities,
      minority interest in subsidiary and stockholders’ equityCurrent
      liabilities:Accounts
      payable
                  
                  $
                  936,119
                  
                  
                  $
                  344,597Accrued
      liabilities
                  
                  
                  730,416
                  
                  
                  
                  430,215Income
      tax liability
                  
                  
                  249,291
                  
                  
                  
                  237,548Capital
      lease obligation, current
                  
                  
                  9,351
                  
                  
                  
                  -Total
      current liabilities
                  
                  
                  1,925,177
                  
                  
                  
                  1,012,360Deferred
      lease obligation
                  
                  
                  3,955
                  
                  
                  
                  4,918Capital
      lease obligation, less current portion
                  
                  
                  39,185
                  
                  
                  
                  -Patent
      obligation
                  
                  
                  20,000
                  
                  
                  
                  -Total
      liabilities
                  
                  
                  1,988,317
                  
                  
                  
                  1,017,278Minority
      interest in subsidiary
                  
                  
                  769,810
                  
                  
                  
                  978,174Stockholders’
      equity:Preferred
      stock, $0.01 par value; 1,000,000 shares authorized no shares issued and
      outstanding at
                    September
      30, 2008 and December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -Series
      A convertible preferred stock, $0.001 par value; no shares authorized,
      issued or outstanding
                    at
      September 30, 2008 and 5,000,000 shares authorized, issued and outstanding
      at December 31, 2007
                  
                  
                  -
                  
                  
                  
                  5,000Series
      B convertible preferred stock, $0.001 par value; no shares authorized,
      issued or outstanding
                    at
      September 30, 2008 and 8,500,000 shares authorized, 6,350,333 issued and
      outstanding at December 31, 2007
                  
                  
                  -
                  
                  
                  
                  6,350Common
      stock, $0.001 par value; no shares authorized, issued or outstanding at
      September 30, 2008
                    and
      40,000,000 shares authorized, 14,087,824 issued and outstanding at
      December 31, 2007
                  
                  
                  -
                  
                  
                  
                  14,088Common
      stock, $.01 par value: 75,000,000 shares authorized, 27,845,998 shares
      issued and
                    outstanding
      at September 30, 2008, no shares authorized, issued or outstanding at
      December 31, 2007
                  
                  
                  278,460
                  
                  
                  
                  -Additional
      paid-in capital
                  
                  
                  21,756,396
                  
                  
                  
                  20,164,976Accumulated
      other comprehensive income
                  
                  
                  1,628,008
                  
                  
                  
                  -Deficit
      accumulated during the development stage
                  
                  
                  (22,392,076
                  )
                  
                  
                  (12,980,595
                  )Total
      stockholders’ equity
                  
                  
                  1,270,788
                  
                  
                  
                  7,209,819Total
      liabilities, minority interest in subsidiary and stockholder's
      equity
                  
                  $
                  4,028,915
                  
                  
                  $
                  9,205,271
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
 Table of Contents
  DARA
BIOSCIENCES, INC.
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
   Three months ended
                  September 30,
                
                
                Nine months
      ended
                  September 30,
                
                
                Period
      from
                  June 22,
      2002
                  (inception)
      through
                  September 30,
      20082008
                
                
                2007
                
                
                2008
                
                
                2007Operating
      expenses:Research
      and development
                
                $
                2,704,727
                
                
                $
                814,977
                
                
                $
                6,197,208
                
                
                $
                2,178,795
                
                
                $
                16,244,976General
      and administrative
                
                
                1,271,564
                
                
                
                775,237
                
                
                
                3,537,865
                
                
                
                1,838,320
                
                
                
                15,461,420Total
      operating expenses
                
                
                3,976,291
                
                
                
                1,590,214
                
                
                
                9,735,073
                
                
                
                4,017,115
                
                
                
                31,706,396Loss
      from operations
                
                
                (3,976,291
                )
                
                
                (1,590,214
                )
                
                
                (9,735,073
                )
                
                
                (4,017,115
                )
                
                
                (31,706,396
                )Other
      income, net:Gain
      on distribution of nonmonetary asset
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,658,251
                
                
                
                4,669,043Other
      (expense) income, net
                
                
                2,468
                
                
                
                17,183
                
                
                
                (16,496
                )
                
                
                50,333
                
                
                
                119,403Interest
      (expense) income, net
                
                
                3,925
                
                
                
                180,190
                
                
                
                131,723
                
                
                
                391,837
                
                
                
                797,871Gain
      on sale of marketable securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,773,087
                
                
                
                5,649,632Other
      (expense) income, net
                
                
                6,393
                
                
                
                197,373
                
                
                
                115,227
                
                
                
                4,873,508
                
                
                
                11,235,949(Loss)
      income before undistributed loss in equity method investmentsand
      minority interest
                
                
                (3,969,898
                )
                
                
                (1,392,841
                )
                
                
                (9,619,846
                )
                
                
                856,393
                
                
                
                (20,470,447
                )Minority
      interest
                
                
                58,789
                
                
                
                146,544
                
                
                
                208,365
                
                
                
                334,893
                
                
                
                672,139Undistributed
      loss in equity method investments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,374,422
                )Net
      (loss) income attributable to common stockholders
                
                $
                (3,911,109
                )
                
                $
                (1,246,297
                )
                
                $
                (9,411,481
                )
                
                $
                1,191,286
                
                
                $
                (22,172,730
                )Basic
      net (loss) income per common share
                
                $
                (0.14
                )
                
                $
                (0.09
                )
                
                $
                (0.41
                )
                
                $
                0.08Shares
      used in computing basic net (loss) income per common share
                
                
                27,619,876
                
                
                
                14,530,236
                
                
                
                23,206,008
                
                
                
                14,527,496Diluted
      net (loss) income per common share
                
                $
                (0.14
                )
                
                $
                (0.09
                )
                
                $
                (0.41
                )
                
                $
                0.04Shares
      used in computing diluted net (loss) income per common
    share
                
                
                27,619,876
                
                
                
                14,530,236
                
                
                
                23,206,008
                
                
                
                27,178,416
  The
accompanying notes are an integral part of these consolidated financial
statements.
  4
 Table of Contents
  DARA
BIOSCIENCES, INC.
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
  For
      the nine months ended
                    September
      30,
                  
                  
                  Period
      from
                    June 22,
      2002
                    (inception)
      through
                    September
      30, 20082008
                  
                  
                  2007Operating
      activitiesNet
      (loss) income
                  
                  $
                  (9,411,481
                  )
                  
                  $
                  1,191,286
                  
                  
                  $
                  (22,172,730
                  )Adjustments
      to reconcile net (loss) income to net cash used in operating
      activities:Depreciation
                  
                  
                  113,126
                  
                  
                  
                  21,600
                  
                  
                  
                  214,301Forgiveness
      of stock subscription receivable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  242,500Recognition
      of expense related to nonmonetary asset
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,035,589Minority
      interest in subsidiary
                  
                  
                  (208,365
                  )
                  
                  
                  (334,893
                  )
                  
                  
                  (672,139
                  )Loss
      from equity investment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,374,422Accretion
      of debt discount
                  
                  
                  -
                  
                  
                  
                  14,490
                  
                  
                  
                  406,359Shares
      issued to directors for services
                  
                  
                  99,731
                  
                  
                  
                  -
                  
                  
                  
                  115,731Share-based
      compensation
                  
                  
                  1,115,454
                  
                  
                  
                  387,792
                  
                  
                  
                  3,449,667Expense
      of warrants issued with convertible notes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,860Loss
      on disposal of furniture, fixtures and equipment
                  
                  
                  16,496
                  
                  
                  
                  -
                  
                  
                  
                  34,535Gain
      on distribution of investments
                  
                  
                  -
                  
                  
                  
                  (2,658,251
                  )
                  
                  
                  (4,669,043
                  )Gain
      on sale of marketable securities
                  
                  
                  -
                  
                  
                  
                  (1,773,087
                  )
                  
                  
                  (5,649,632
                  )Deferred
      lease obligation
                  
                  
                  (963
                  )
                  
                  
                  (6,060
                  )
                  
                  
                  3,956Changes
      in operating assets and liabilities:Interest
      receivable
                  
                  
                  44,439
                  
                  
                  
                  1,399
                  
                  
                  
                  -Prepaid
      license fee and other prepaid expenses
                  
                  
                  72,611
                  
                  
                  
                  -
                  
                  
                  
                  (562,037
                  )Due
      from affiliates
                  
                  
                  -
                  
                  
                  
                  63,457
                  
                  
                  
                  -Accounts
      payable
                  
                  
                  591,522
                  
                  
                  
                  98,986
                  
                  
                  
                  606,119Accrued
      liabilities
                  
                  
                  (549,400
                  )
                  
                  
                  523,082
                  
                  
                  
                  (11,239
                  )Net
      cash used in operating activities
                  
                  
                  (8,116,830
                  )
                  
                  
                  (2,470,199
                  )
                  
                  
                  (25,248,781
                  )Investing
      activitiesPurchases
      of furniture, fixtures, and equipment
                  
                  
                  (17,410
                  )
                  
                  
                  (4,932
                  )
                  
                  
                  (177,881
                  )Proceeds
      from sale of furniture, fixtures, and equipment
                  
                  
                  2,844
                  
                  
                  
                  -
                  
                  
                  
                  3,802Cash
      acquired in reverse merger
                  
                  
                  771,671
                  
                  
                  
                  -
                  
                  
                  
                  771,671Payments
      on Capital Leases
                  
                  
                  (2,241
                  )
                  
                  
                  -
                  
                  
                  
                  (2,241
                  )Purchase
      of investments in affiliates
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,471,400
                  )Issuance
      of notes receivable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,400,000
                  )Payments
      on notes receivable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  711,045Proceeds
      from sale of marketable securities
                  
                  
                  -
                  
                  
                  
                  1,773,087
                  
                  
                  
                  1,773,087Proceeds
      from sale of investments in affiliates
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,905,692Net
      cash provided by investing activities
                  
                  
                  754,864
                  
                  
                  
                  1,768,155
                  
                  
                  
                  3,113,775
  The
accompanying notes are an integral part of these consolidated financial
statements.
  5
 Table of Contents
  DARA
BIOSCIENCES, INC.
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
 (Unaudited)
  For
      the nine months ended

                    September
      30,
                
                
                Period
      fromJune
      22, 2002

                    (inception)
      through

                      September
      30, 20082008
                
                
                2007Financing
      ActivitiesProceeds
      from issuance of notes payable
                
                
                -
                
                
                
                -
                
                
                
                105,000Principal
      payments on notes payable
                
                
                -
                
                
                
                -
                
                
                
                (255,000
                )Proceeds
      from exercise of options and warrants
                
                
                -
                
                
                
                -
                
                
                
                80,051Proceeds
      from issuance of preferred stock and common stock, net of issuance
      costs
                
                
                188,554
                
                
                
                -
                
                
                
                23,294,549Net
      cash provided by financing activities
                
                
                188,554
                
                
                
                -
                
                
                
                23,224,600Net
      (decrease) increase in cash and cash equivalents
                
                
                (7,173,412
                )
                
                
                (702,044
                )
                
                
                1,089,594Cash
      and cash equivalents at beginning of period
                
                
                8,263,006
                
                
                
                12,274,641
                
                
                
                -Cash
      and cash equivalents at end of period
                
                $
                1,089,594
                
                
                $
                11,572,597
                
                
                $
                1,089,594Supplemental
      disclosure of non-cash financing activityEquipment
      purchased through financing
                
                $
                52,543
                
                
                $
                -
                
                
                $
                73,061Advances
      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
                )Unrealized
      gain on available for sale securities
                
                
                1,628,008
                
                
                
                -
                
                
                
                1,628,008Forgiveness
      of stock subscription receivable
                
                
                -
                
                
                
                -
                
                
                
                242,500Shares
      issued to directors for services
                
                
                99,731
                
                
                
                -
                
                
                
                115,731Shares
      issued to third-party for services
                
                
                19,527
                
                
                
                -
                
                
                
                19,527Conversion
      of note into equity of subsidiary
                
                
                -
                
                
                
                1,441,948
                
                
                
                1,441,948
  The
accompanying notes are an integral part of these consolidated financial
statements.
  6
 Table of Contents
  DARA
BIOSCIENCES, INC.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  1.
The Company and Basis of Presentation
  DARA
BioSciences, Inc (the “Company”), headquartered in Raleigh, North Carolina, was
incorporated on June 22, 2002.  The Company is a development stage
company that acquires therapeutic drug candidates for development and subsequent
licensing or sale to pharmaceutical companies.
 The
activities of the Company have primarily consisted of establishing offices,
recruiting personnel, conducting research and development, performing business
and financial planning and raising capital. Accordingly, the Company is
considered to be in the development stage. The Company has incurred losses since
inception through September 30, 2008 of $22,172,730 and expects to continue to
incur losses and require additional financial resources to achieve
commercialization of its products.
  On
February 12, 2008, the Company, formerly known as Point Therapeutics,
Inc.(the “Company”), completed the merger transaction (the “Merger”)
contemplated by the Agreement and Plan of Merger dated October 9, 2007, as
amended December 19, 2007 (the “Merger Agreement”), among the Company, DP
Acquisition Corp., a wholly-owned subsidiary of the Company (“Merger Sub”), and
DARA BioSciences, Inc., a privately held development stage pharmaceutical
company based in Raleigh, North Carolina (“DARA”). Pursuant to the Merger, each
share of DARA common stock and preferred stock issued and outstanding
immediately prior to the effective time of the Merger ceased to be outstanding
and was converted into the right to receive 1.031406 shares of Company common
stock, plus cash in lieu of any fractional shares. As a result of the
transaction, the former DARA stockholders received 96.4% of the Company’s
outstanding shares of common stock on a fully-diluted basis and Merger Sub
merged with and into DARA, with DARA surviving as a wholly-owned subsidiary of
the Company. Upon consummation of the Merger, the Company changed its name to
DARA BioSciences, Inc.
  For
accounting purposes, the Merger was treated as a reverse acquisition with DARA
being the accounting acquirer. Accordingly, the historical financial information
in these financial statements prior to the Merger is that of DARA and its
consolidated subsidiaries and all references to the “Company” in these financial
statements relating to periods prior to the Merger refer to DARA (see Note 4).
  The
Company’s business is subject to significant risks consistent with specialty
pharmaceutical and biotechnology companies that are developing technologies and
eventually products for human therapeutic use. These risks include, but are not
limited to, 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 (consisting of normal recurring
accruals) 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, 2008.
  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: MIKKO Pharmaceuticals; DARA Therapeutics,
Inc.; and Signum Pharmaceuticals, Inc. 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.
  7
 Table of Contents
  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.
  Investments
  The
Company accounts for its investment in marketable securities in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 115,Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”).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.
  Investments
in marketable securities with maturities beyond one year may be classified as
short term based on their highly liquid nature and because such marketable
securities represent the investment of cash that is available for current
operations.
  In
accordance with SFAS 115, the Company reassesses the appropriateness of the
classification of its investments as of the end of each reporting period. To
date, all 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 in stockholders’
equity.
  The
Company utilizes SFAS No. 157, Fair Value Measurements
(“SFAS 157”) to value its financial assets and liabilities.
  SFAS
157’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.
SFAS 157 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 uses valuation models in
determining fair value. Based on this valuation technique, the Company utilizes
certain assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and or risks inherent in the inputs.
  The
Company’s other investments include investments in privately-held
companies. Pursuant to APB 18, The Equity Method of Accounting for
Investments in Common Stock, 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. 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. In making impairment determinations
for investments of available-for-sale securities, the Company also reviews the
current market price for other-than-temporary declines in values following the
guidance required by Financial Accounting Standards Board (FASB) Staff Position
115-1, The Meaning of
Other-Than Temporary Impairment and Its Application to Certain
Investments.
 8
 Table of Contents
  Furniture,
Fixtures and Equipment
  Furniture,
fixtures and equipment are recorded at cost and depreciated over the estimated
useful lives of the assets (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, manufacturing, process development and
clinical product supply costs, research costs and other consulting and
professional services, and allocated facility and related expenses.
  Share-Based
Compensation Valuation and Expense
  Share-based
compensation is accounted for using the fair value method prescribed by SFAS No.
123R, Accounting for
Share-Based Payment (“SFAS 123R”). For stock and stock-based awards
issued to employees, a compensation charge is recorded against earnings based on
the fair value of the award on the date of grant. 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.
  Income
Taxes
  The
Company uses the liability method in accounting for income taxes as required by
SFAS No. 109, Accounting for
Income Taxes (“SFAS 109”). Under this method, deferred tax assets and
liabilities are recognized for operating loss and tax credit carryforwards 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.
  On
January 1, 2007, the Company adopted Financial Accounting Standards
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes- an interpretation of FASB Statement No.109 (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS 109. FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition. The Company’s policy is to classify any interest or penalties
recognized in accordance with FIN 48 as interest expense or an expense other
than income tax expense, respectively.
  Concentration
of Credit Risk
  Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and marketable securities.
The Company maintains deposits in federally insured financial institutions in
excess of federally insured limits.
  Comprehensive
Income (Loss)
  Statement
of Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive
Income, requires components of other comprehensive income, including
gains and losses on available-for-sale investments, to be included as part of
total comprehensive income. The Company displays comprehensive income (loss) and
its components as part of the statement of stockholders’ equity in its annual
financial statements. Comprehensive income (loss) consists of net loss and
unrealized gains and losses on available-for-sale investments. Comprehensive
income (loss) for the three and nine months ended September 30, 2008 consists of
net income and unrealized gain on available-for-sale investments. Comprehensive
income (loss) for the three and nine months ended September 30, 2007 was equal
to net income (loss) as there was no unrealized gains (losses) on such
investments.
  As of
September 30, 2008, an unrealized gain of $1,628,008 has been recorded in
accumulated other comprehensive income in the accompanying Consolidated Balance
Sheet. Comprehensive loss consists of net loss and unrealized gains and losses
on available-for-sale investments. Comprehensive loss was $3,887,109 and
$7,783,473 for the three and nine month periods ended September 30, 2008,
respectively.
 9
 Table of Contents
  Net
(Loss) Earnings Per Common Share
  The
Company calculates its basic (loss) earnings per share in accordance
with Statement of Financial Accounting Standards (“SFAS”) No.
128, 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) earnings per share is
computed by dividing the earnings or 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, options and warrants to
purchase common stock are considered to be common stock equivalents but have
been excluded from the three months and nine months ended September 30, 2008
calculation of diluted net loss per share as their effect is anti-dilutive. For
the three months and nine months ended September 30, 2007, 177,951 warrants have
been excluded from the calculation of diluted earnings per share because their
inclusion would be anti-dilutive.
  Three
      months ended
                  September
      30,2008
                
                
                2007Net
      loss attributable to common stockholders
                
                $
                (3,911,109
                )
                
                $
                (1,246,297
                )Basic
      and diluted net loss per share:Weighted-average
      shares used in computing basic net loss per share
                
                
                27,619,876
                
                
                
                14,530,236Weighted-average
      shares used in computing diluted net loss per share
                
                
                27,619,876
                
                
                
                14,530,236Basic
      net loss per common share
                
                $
                (0.14
                )
                
                $
                (0.09
                )Diluted
      net loss per common share
                
                $
                (0.14
                )
                
                $
                (0.09
                )
  Nine
      months ended
                  September
      30,2008
                
                
                2007Net
      (loss) income attributable to common stockholders
                
                $
                (9,411,481
                )
                
                $
                1,191,286Basic
      and diluted net (loss) income per share:Weighted-average
      shares used in computing basic net (loss) income per share
                
                
                23,206,008
                
                
                
                14,527,496Dilutive
      effect of conversion of preferred stock
                
                
                -
                
                
                
                11,706,802Dilutive
      effect of options and warrants
                
                
                -
                
                
                
                944,118Weighted-average
      shares used in computing diluted net (loss) income per
    share
                
                
                23,206,008
                
                
                
                27,178,416Basic
      net (loss) income per common share
                
                $
                (0.41
                )
                
                $
                0.08Diluted
      net (loss) income per common share
                
                $
                (0.41
                )
                
                $
                0.04
  Recently
Issued Accounting Pronouncements
  In
September 2006, the Financial Accounting Standards Board issued SFAS
No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines fair value, provides a
consistent framework for measuring fair value under GAAP and expands fair value
financial statement disclosure requirements. SFAS 157 does not require any new
fair value measurements. It only applies to accounting pronouncements that
already require or permit fair value measures, except for standards that relate
to share-based payments (SFAS 123R, Share Based
Payment). SFAS 157 is effective for fiscal years beginning after
November 15, 2007.  Effective January 1, 2008, the Company
adopted the provisions of SFAS No.157. The adoption of  SFAS 157 had
no effect on the consolidated financial statements.
 Effective
January 1, 2008, the Company adopted Emerging Issues Task Force (“EITF”)
Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities (“EITF 07-3”). Nonrefundable advance
payments for goods or services that will be used or rendered for future research
and development activities should be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are delivered or the
services are performed, or when the goods or services are no longer expected to
be provided. The Company’s adoption of EITF 07-3 did not have a material effect
on the Company’s consolidated results of operations and financial position.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Non-controlling Interests
in Consolidated Financial Statements — an amendment of ARB No.51 (“Statement 160”).
Statement 160 requires that non-controlling
interests (previously referred to as minority interests) be clearly identified
and presented as a component of equity, separate from the parent’s equity.
Statement 160 also requires that the amount of consolidated net income
attributable to the parent and to the non-controlling
interest be clearly identified and presented on the face of the consolidated
statement of income; that changes in ownership interest be accounted for as
equity transactions; and that when a subsidiary is deconsolidated, any retained
non-controlling
equity investment in that subsidiary and the gain or loss on the deconsolidation
of that subsidiary be measured at fair value. Statement 160 is to be applied
prospectively, except for the presentation and disclosure requirements (which
are to be applied retrospectively for all periods presented) and is effective
for fiscal years beginning after December 15, 2008, which for the Company
is the fiscal year beginning January 1, 2009. The Company is currently
evaluating the effect that the adoption of SFAS No. 160 will have on its
financial position, results of operations or cash flows.
  10
 Table of Contents
  3.
Investments in Marketable Securities
  The
Company’s marketable securities classified as available-for-sale entirely
consist of equity securities in MiMedx Group, Inc., formerly Spine Medica, Inc.,
a privately held company. MiMedx merged with Alynx and became public on February
8, 2008. The Company had carried the investment at cost of $400 and classified
it as a long-term investment in prior fiscal years.
 
 Utilizing
SFAS 157, the valuation of MiMedx was based upon Level 3 inputs. This resulted
in a fair value of $1,628,408 as of September 30, 2008 which represents an
unrealized gain of $24,000 in the current period.
 
 The
Company does not have any other assets measured at fair value that would require
non-recurring fair value adjustments (for example, where there is evidence of
impairment).
 
 4.
Merger
  On
February 12, 2008, DARA and Point Therapeutics, Inc. (“Point”) completed
the Merger as described in Note 1. The Directors of Point and DARA,
respectively, believed that by combining Point and DARA, the combined company
would generate improved long-term operating and financial results and establish
a stronger competitive position in the industry by gaining access to greater
resources, diversification and increased access to capital. In merging with
Point, the DARA board also considered the potential for increased liquidity for
its stockholders expected as the result of the Merger.
  Following
the effectiveness of the Merger, Point changed its corporate name to DARA
BioSciences, Inc. and changed its ticker symbol on the NASDAQ Capital Market to
“DARA”. The Merger was intended, among other things, to allow the business of
privately-held DARA to be conducted by the Company given that DARA’s business
became the primary business of the Company following the Merger.
  The
Merger was accounted for as a reverse acquisition under the purchase method of
accounting for business combinations in accordance with GAAP. Under this method
of accounting, Point is treated as the acquired company for financial reporting
purposes. On February 12, 2008, Point had approximately $762,000 in
cash.  Under the terms of the Merger Agreement, as of the closing of the
Merger, the former holders of DARA equity securities acquired 96.4% of the
capital stock of the Company (on a fully diluted basis). Immediately following
the Merger, the Board of Directors of the Company consisted of six directors,
all of whom were former directors of DARA. In addition, the senior management
team of DARA manages the operations of the Company, with the exception of the
Chairman of the Board of Directors and Chief Executive Officer who resigned from
the Company as of March 21, 2008.  In accordance with guidance
applicable to these circumstances, the Merger was considered to be a capital
transaction in substance. Accordingly, for accounting purposes, the Merger was
treated as the equivalent of the Company issuing stock for the net assets of
Point. The net assets of Point were stated at fair value, which approximates
historical cost, with no goodwill or other intangible assets recorded. The
Company’s deficit accumulated in the development stage was carried forward after
the Merger. Following is the allocation of the purchase price to the net assets
of Point based on fair values:
 Cash
              
              $
              771,671Other
      current assets
              
              
              480,638Fixed
      assets, net of depreciation
              
              
              21,979Accrued
      liabilities
              
              
              (803,324
              )Merger
      transaction cost expensed
              
              
              1,271,950Total
      purchase price
              
              $
              1,742,914
 
 The
Merger had no effect on loss per share.
  5.
Income Taxes
  The
Company recorded no tax expense in either of the nine months ended September 30,
2008 or 2007.
 
 The
Company maintains a full valuation allowance against its net deferred tax assets
and will continue to do so until an appropriate level of profitability is
sustained or tax strategies can be developed that would enable the Company to
conclude that it is more likely than not that a portion of these net deferred
assets would be realized.
 
 The
Company adopted the provisions of FASB Interpretation No.48 Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No.109 as of January 1, 2007. As
of January 1, 2008 the Company had approximately $237,548 of unrecognized tax
liabilities. The total balance of unrecognized liabilities at September 30, 2008
of $249,291, if recognized, would affect the effective tax rate. Consistent with
prior periods, the Company recognized interest and penalties within its income
tax provision.
 
 11
 Table of Contents
  6.
Stockholders’ Equity
  Pursuant
to the Merger, each share of DARA common stock and preferred stock issued and
outstanding immediately prior to the effective time of the merger ceased to be
outstanding and was converted into the right to receive 1.031406 shares of
post-merger Company common stock, plus cash in lieu of any fractional shares.
Additionally, outstanding options and warrants to purchase shares of DARA common
stock became options and warrants to purchase shares of post-merger Company
common stock adjusted as follows: the number of shares acquirable upon exercise
was multiplied by 1.031406 and the exercise price per share was divided by
1.031406. As a result of the transaction, the former DARA stockholders received
96.4% of the Company’s outstanding shares of common stock on a fully-diluted
basis and Merger Sub merged with and into DARA, with DARA surviving as a
wholly-owned subsidiary of the Company.
  7.
Stock-Based Compensation
  Effective
with the adoption of SFAS 123R, Share Based Payments as of January 1, 2006,
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. SFAS 123R 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.
  Prior to
February 12, 2008 the Company was a privately-held company and its common
stock was not publicly traded. The fair value of stock options granted from
January 2006 through completion of the Merger and related stock-based
compensation expense was determined based upon the price the board determined at
time of grant multiplied by the exchange ratio of the shares in the Merger.
  The
weighted average assumptions utilized to determine fair value are summarized in
the following table:
  Nine
      monthsended
      September 30,2008Expected
      dividend yield
              
              
              -Expected
      volatility
              
              
              77
              %Weighted-average
      expected life (in years)
              
              
              5.8Risk
      free interest rate
              
              
              3.02
              %Forfeiture
      rate
              
              
              10
              %
 
 The
adoption of SFAS No. 123R had a significant impact on our results of operations.
The Company’s consolidated statements of operations for the three months and
nine months ended September 30, 2008 and 2007, respectively, includes the
following stock-based compensation expense related to issuances of stock options
which the Company recognized as stock-based compensation expense as
follows:
 
 Three months ended
                  September 30,
                
                
                Nine months ended
                  September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Research
      and development
                
                $
                309,706
                
                
                $
                48,616
                
                
                $
                481,851
                
                
                $
                103,553General
      and administrative
                
                
                356,522
                
                
                
                94,971
                
                
                
                613,229
                
                
                
                284,239Total
      stock-based compensation
                
                $
                666,228
                
                
                $
                143,587
                
                
                $
                1,095,080
                
                
                $
                387,792
 
 Unrecognized
stock-based compensation expense, including time-based options,
performance-based options and restricted stock awards, expected to be recognized
over an estimated weighted-average amortization period of 2.2 years was
approximately $1,309,000 at September 30, 2008. Unrecognized stock-based
compensation expense related to restricted stock awards expected to be
recognized over an estimated 2.6 years was approximately $135,000 at September
30, 2008.
 The
Company issued 35,000 restricted shares to a new board director during the three
months ended September 30, 2008, of which 25% vested immediately. The remaining
issued shares vest pro rata over the next three years on the anniversary of the
director’s appointment. The Company recognized stock-based compensation for
awards to certain board of directors of $28,157 and $99,731 for the three and
nine months ended September 30, 2008, respectively. The Company had no
stock-based compensation expense for board of directors for the three and nine
months ended September 30, 2007.
  The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of Emerging Issues Task Force (EITF) No.96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, 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. The measurement of stock-based compensation is subject to
periodic adjustments as the underlying equity instruments vest and is recognized
as an expense over the term of the related financing or the period over which
services are received. During the three months ended September 30, 2008 the
Company issued 220,000 restricted shares to an investor relations company for
contracted services. The Company recognized stock-based compensation expense for
awards to these non-employees totaling $20,374 for the three and nine months
ended September 30, 2008. The Company recognized stock-based compensation
expense to non-employees of $0 and $1,706 for the three and nine months ended
September 30, 2007.
 12
 Table of Contents
  A summary
of activity under the Company’s stock option plans for the nine month period
ended September 30, 2008 is as follows (adjusted for the effect of the
merger):
  Options
      OutstandingSharesAvailable
                To
      Grant
              
              Number
      of
                Shares
              
              
              Weighted-Average
                ExercisePriceBalance
      at December 31, 2007
              
              
              687,352
              
              2,750,530
              
              
              $
              1.78Options
      authorized under the 2008 Plan
              
              
              4,606,246
              
              —
              
              
              
              —Reduction
      to options available to be issued under the 2003 Plan
              
              
              (671,881
              )
              —
              
              
              
              —Options
      granted
              
              
              (475,309
              )
              475,309
              
              
              
              1.46Shares
      issued to directors
              
              
              (105,000
              )
              —
              
              
              
              —Options
      exercised
              
              
              —
              
              (290,083
              )
              
              
              0.65Shares
      cancelled and forfeited
              
              
              —
              
              (707,543
              )
              
              
              2.08Balance
      at September 30, 2008
              
              
              4,041,408
              
              2,228,213
              
              
              
              1.76
 
 Additionally,
the Company has reserved 17,920 shares of common stock for the potential
exercise of outstanding options with a weighted-average exercise price of
$137.20 for issuance under Point’s 1994 Plan, 1997 Plan, and 2003 Directors’
Plan.
 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 matters as of
the date of these financial statements.
  9.
Subsequent Events
  On
October 21, 2008, the Company entered into a Securities Purchase Agreement with
certain investors in connection with a registered direct offering (the
“Offering”) of up to 8,500,000 shares of the Company’s common stock and up to
13,600,000 warrants (less 850,000 Class A Warrants to Gilford Securities, Inc.,
the placement agent),  to purchase shares of the Company’s common stock.
The terms of the Offering provide for the common stock and warrants to be sold
in units for $1.00 per unit, with each unit consisting of (1) one share of
common stock, (2) a Class A Warrant to purchase one share of common stock for
each unit purchased at the greater of (a) the consolidated bid price on NASDAQ
Capital Market on the trading day immediately preceding the applicable closing
date plus $.01 and (b) $1.30 or, if higher, the exercise price for Class A
Warrants set at an earlier closing  and (3) a Class B Warrant to
purchase one-half of a share of common stock for each unit purchased at $2.25
per share. Class A Warrants are exercisable beginning six months after the date
of issuance and expire five years after they first become exercisable. Class B
Warrants are exercisable beginning 12 months after the date of issuance and
expire five years after they first become exercisable. The shares of common
stock and Warrants in the Offering are being offered pursuant to an effective
shelf registration statement on Form S-3, which was initially filed with the SEC
on April 9, 2008 and declared effective on April 18, 2008 (File
No.333-150150).
 The
Company sold 2,255,000 units of common stock, 2,255,000 Class A warrants to
purchase common stock, and 1,127,500 Class B warrants to purchase common stock
at an initial closing that was completed on October 21, 2008 for cash proceeds
(net of cash fees payable to the placement agent) of $2,029,500. There can be no
assurance that the Company will be able to sell any additional units in the
Offering. If any additional units are sold in the Offering, they will be sold at
a second closing and, if necessary, a third closing. The Company anticipates
using the net proceeds raised in the Offering for working capital and other
general corporate purposes, and possibly acquisitions of other companies,
products or technologies. Working capital and other general corporate purposes
may include research and development expenditures and capital expenditures.
  13
  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
Consolidated Financial Statements and related Notes included elsewhere in this
Quarterly Report on Form 10-Q. Some of the information contained in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this report includes forward-looking statements
based on our current management’s expectations. 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 a result of
various factors, including, among others, our limited operating history,
unpredictability of future program dispositions and operating results,
competitive pressures and the other potential risks and uncertainties discussed
in the Risk Factors section of our Annual Report on Form 10-K for the year ended
December 31, 2007.
  Merger
Transaction
  On
February 12, 2008, DARA BioSciences, Inc., formerly known as Point Therapeutics,
Inc. (“we,” “us” and “our” or the “Company”), completed the merger transaction
(the “Merger”) contemplated by the Agreement and Plan of Merger dated October 9,
2007, as amended December 19, 2007, among the Company, DP Acquisition Corp., a
wholly-owned subsidiary of the Company (“Merger Sub”), and DARA BioSciences,
Inc., a privately-held development stage pharmaceutical company based in
Raleigh, North Carolina (“DARA”).
  Pursuant
to the Merger, each share of DARA common stock and preferred stock issued and
outstanding immediately prior to the effective time of the Merger ceased to be
outstanding and was converted into the right to receive 1.031406 shares of
Company common stock, plus cash in lieu of any fractional shares. As a result of
the transaction, the former DARA stockholders received 96.4% of the Company’s
outstanding shares of common stock on a fully-diluted basis and Merger Sub
merged with and into DARA, with DARA surviving as a wholly-owned subsidiary of
the Company. Upon consummation of the Merger, the Company changed its name to
DARA BioSciences, Inc.
  For
accounting purposes, the Merger was treated as a reverse acquisition with DARA
being the accounting acquirer. Accordingly, the historical financial information
in this Form 10-Q prior to the Merger is that of DARA and its consolidated
subsidiaries and all references to the “Company” in this Form 10-Q relating to
periods prior to the Merger refer to DARA (see Note 4).
  14
 Table of Contents
  Overview
  We are a
Raleigh, North Carolina-based development stage pharmaceutical company that
acquires promising therapeutic drug candidates from third parties and advances
their clinical development for later sale or license to pharmaceutical
companies. We operate a business model that focuses on the
following:
 Obtaining
  patents for innovative drug candidates which we believe have value in the
  marketplace; Utilizing
  a small group of talented employees to develop those ideas through proof of
  concept in patients (generally through phase 2a clinical trials) by working
  with strategic outsource partners; and Licensing
  the resulting product to a strong pharmaceutical partner to commercialize. We
  do not intend to fully develop, obtain clearance from the U.S. Food and Drug
  Administration (“FDA”) and then market the drug candidates we are
  developing.
 We hire
experts with strong project management skills in specific disciplines we believe
are important to maintain within our company. We contract with and manage strong
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. It allows us to control our
annual expenses and to optimize resources.
  After we
establish proof of concept for an innovative drug candidate, we seek a strong
pharmaceutical partner to license the drug candidate and to commercialize it
after regulatory approval. The success of our business is highly dependent on
the marketplace value of our drug candidates, the related patents we obtain and
our ability to find strong commercial partners to successfully commercialize the
drug candidates.
  We
generally in-license drug candidates that are prepared to enter pre-clinical
studies prior to being submitted for an Investigational New Drug application
(“IND”) (which is part of the process to get approval from the FDA for marketing
a new prescription drug in the U. S.). Operationally we advance the development
of our drug candidates from the stage we in-license the compound, typically at
the pre-clinical stage of development, to obtain FDA approval of an IND
application, test the drug candidates in Phase 1 and Phase 2 clinical trials and
seek to license the drug candidate or find a collaborative partner who would
further the development of the compound in later stage trials and commercialize
it. Key indicators to evaluate our success are how our drug candidates advance
through the drug development process, and ultimately, if we are successful in
negotiating collaborations, licenses, or sales agreements with larger
pharmaceutical companies for our drug candidates. In order to successfully
achieve these goals, having sufficient liquidity is important since we do not
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.
To date, we have received net proceeds from the sale of those assets in the
amount of approximately $5,650,000. These proceeds together with capital raised
from the sale of our securities have been our primary source of working capital.
  We expect
to continue to incur operating losses over the next several years as we complete
the development of our current portfolio of drug candidates and acquire and
develop new drug candidates. Our results may vary depending on many factors,
including pre-clinical and clinical test results, the performance of our
strategic outsource partners and the progress of licensing activities with
pharmaceutical partners.
  Status
of our Drug Candidates
  We
currently have a portfolio of five programs with drug candidates for the
treatment of neuropathic pain, type 2 diabetes and psoriasis. In the third
quarter we have focused our resources towards the development of our two most
advanced programs, KRN5500 and DB959. Due to this allocation of resources,
development of our other three programs DB160, DB900 and DB200, has been
significantly delayed. Based on our present working capital, we believe that we
have sufficient working capital to maintain our existing, most advanced
programs, KRN5500 and DB959 into the first quarter of 2009 and that we will
require additional funding to meet our working capital needs to progress those
programs to a liquidity event through a collaboration, sale or out-license. A
brief discussion of the status of each of our drug candidates follows.
  KRN5500
  KRN5500
is a drug candidate for the treatment of neuropathic pain in cancer patients. An
active component of KRN5500 has been shown to inhibit nerve cell pain signals.
The primary segment of this market being targeted is chemotherapy-induced
neuropathic pain. The drug candidate is presently being tested in a Phase 2a
clinical trial in cancer patients with neuropathic pain to assess its safety and
efficacy. This trial is expected to be completed in the fourth quarter of 2008.
A second larger Phase 2 trial is planned for initiation in 2009 assuming
sufficient additional funding is secured.
  We
incurred approximately $167,000 and $769,000 in development costs associated
with the development of KRN5500 for the three and nine month periods ended
September 30, 2008, respectively, and we have incurred costs of approximately
$2.8 million from inception to date. We estimate the market potential for
chemotherapy-induced neuropathy to be roughly $1.6 billion in 2014.
  15
 Table of Contents
  DB959
  DB959 is
a PPARd/g agonist for the treatment
of type 2 diabetes. This compound activates genes involved in the metabolism of
sugars and fats thereby improving the body’s ability to regulate blood sugar. We
are developing this drug candidate as a once-daily oral therapy.  Our
review of non-clinical data indicates that this drug candidate is a potential
leading successor to Avandia® and Actos® because, among other indications, it
increases good HDL cholesterol and lowers triglycerides better than Avandia®
with greater cardiac safety and less weight gain. We expect to file an IND
application to the FDA during the fourth quarter of 2008.
  Our
development work is being conducted under an exclusive worldwide license to
develop and commercialize the drug candidate from Bayer Pharmaceuticals Corp.
This license, which was entered into in October 2007, gives the Company rights
to over 2,000 compounds with agonist activities toward multiple PPAR sub-types.
On October 24, 2008, in accordance with the terms of this license, we provided
Bayer with written notice of our intent to pursue a sublicense of our rights
under the agreement to a third party for purposes of enabling such third party
to commercialize “Licensed Products” (as such term is defined in the
agreement).  Under the terms of the license agreement, unless Bayer
exercises certain rights of first refusal provided to it under the agreement and
we reach agreement with Bayer concerning commercialization of Licensed Products,
we will be permitted to enter into an agreement with a third party concerning
commercialization of Licensed Products.
  We
incurred approximately $1.7 million and $2.5 million in direct outside
development costs associated with the development of DB959 for the three and
nine month periods ended September 30, 2008, respectively, and we have incurred
costs of approximately $2.5 million from inception to date. We estimate the
market potential for the PPAR agonist segment of type 2 diabetes market to be
roughly $5.4 billion in 2010.
  DB160
  DB160 is
a DPP-IV inhibitor for the treatment of type 2 diabetes. DDP-IV is an enzyme
that inactivates a key hormone involved in promoting control of blood sugar
levels thus giving diabetics better control of their blood sugar levels. The
Company is developing this drug candidate as a once-daily oral therapy. We are
currently evaluating the competitive environment for DB160 and potential
positioning of the compound for other indications. During this ongoing
evaluation we have focused our resources on other drug development programs. If
our evaluation concludes that further development is warranted we would expect
to file an IND application to the FDA during third quarter of 2009 assuming
sufficient additional funding is secured. Our development work is being
conducted under an exclusive worldwide license to develop and commercialize the
drug candidate from Nuada, LLC.
  We
incurred approximately $229,000 and $1.3 million in direct outside development
costs associated with the development of DB160 for the three and nine month
periods ended September 30, 2008, respectively, and we have incurred costs of
approximately $2.2 million from inception to date. We estimate the market
potential for the DPP-IV inhibitor segment of the type 2 diabetes market to be
roughly $5.1 billion in 2016.
  DB900
  DB900 is
a series of compounds which are PPARg/a/d agonists for the treatment
of type 2 diabetes. This compound activates genes involved in the metabolism of
sugars and fats thereby improving the body’s ability to regulate blood sugar. A
clinical candidate will be selected from a number of strong lead compounds.
These compounds have the potential to raise good HDL cholesterol, lower bad LDL
cholesterol and lower triglycerides with potential greater efficacy than DB959
as well as the potential to deliver weight loss. This program is currently not
being resourced. Development will not be re-initiated until sufficient
additional funding is secured. Our development work is being conducted under an
exclusive worldwide license to develop and commercialize the drug candidate from
Bayer Pharmaceuticals Corp.
  We
incurred approximately $23,000 and $86,000 in direct outside development costs
associated with the development of DB900 series compounds for the three and nine
month periods ended September 30, 2008, respectively, and we have incurred costs
of approximately $92,000 from inception to date. We estimate the market
potential for the PPAR agonist segment of type 2 diabetes market to be roughly
$5.4 billion in 2010.
  DB200
  DB200
refers to a series of compounds we have which are inhibitors of CPT-1 for the
topical treatment of psoriasis. This drug candidate has the potential to inhibit
inflammation and the proliferation of skin cells thus resulting in decreased
reddening and less flaking of the skin. A clinical candidate may be selected
from a number of strong lead compounds. This program is currently not being
resourced. Development will not be re-initiated until sufficient additional
funding is secured. We expect to file an IND application to the FDA in 2010
assuming sufficient additional funding is secured. There are no third party
licenses associated with this program.
  We
incurred approximately $180,000 and $328,000 in direct development costs
associated with the development of DB200 series compounds for the three and nine
month periods ended September 30, 2008, respectively, and we have incurred costs
of approximately $363,000 from inception to date. We estimate the market
potential for the topical agent segment of the psoriasis market to be roughly
$3.6 billion in 2014.
  Other
  Prior to
the Merger, we studied talabostat (acquired in the merger with Point
Therapeutics, Inc.) in a number of human clinical trials as a potential therapy
in late-stage cancers. In May 2007, the talabostat clinical development program
was put on clinical hold by the FDA as a result of interim clinical results
related to Phase 3 talabostat studies as a potential treatment for patients in
advanced non-small cell lung cancer. We have determined that further development
of talabostat is not warranted at this time and our resources are being applied
to our other programs.
  16
 Table of Contents
  Investments
  Prior to
2007, we made investments in several companies. As a result, we currently hold
investments in the following companies:
  ●
                SurgiVision,
      Inc. is developing “real-time” devices to be used with Functional MRI
      Technology.The company is targeting clinical solutions in areas such as
      MRI-guided deep brain stimulation and cardiac ablation to treat atrial
      fibrillation. This investment represents approximately 10% of the
      outstanding shares of SurgiVision at September 30,
  2008.
  ●
                Cardiovascular
      Solutions, Inc., formerly known as Medeikon Corporation is developing
      technology focusing on the diagnostics of vulnerable plaque using an
      optical detection system. This investment represents approximately 25.4%
      of the outstanding shares of Cardiovascular Solutions, Inc. at September
      30, 2008.
 
 ●
                MiMedx
      Group, Inc. (MDXG.OB) is developing products primarily for use by
      musculoskeletal specialists in both surgical and non-surgical therapy.
      This investment represents approximately 1.5 % of the outstanding shares
      of MiMedx Group, Inc. at September 30,
2008.
 Critical
Accounting Policies and Significant Judgments and Estimates
  This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements, which have been
prepared in accordance with GAAP. 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 research and
development expenses, accrued expenses and share-based compensation. We base our
estimates on historical experience and on various other factors that we believe
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 repayable 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;
 
 ●
              fees
      paid to investigative sites in connection with clinical
      trials;
 
 ●
              fees
      paid to contract manufacturers in connection with the production of raw
      materials, drug substance and drug products;
and
 
 ●
              professional
      service fees.
 
 17
 Table of Contents
  Share-Based
Compensation
  Share-based
compensation is accounted for using the fair value based method prescribed by
SFAS No. 123R, Accounting for
Share-Based Payment (“SFAS 123R”). 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 resulted in compensation
expense of $666,228 and $143,587 for the three months ended September 30, 2008
and 2007, respectively, and $1,095,080 and $387,792 for the nine months ended
September 30, 2008 and 2007, respectively. The Company issued 35,000 restricted
shares to a new board director during the three months ended September 30, 2008,
of which 25% vested immediately. The remaining issued shares vest pro rata over
the next three years on the anniversary of the director’s appointment. The
Company issued 220,000 restricted shares to an investor relations company for
services contracted. The Company recognized stock-based compensation expense for
awards to non-employees totaling $20,374 for the three and nine months ended
September 30, 2008. The Company recognized stock-based compensation for awards
to certain board of directors of $28,157 and $99,731 for the three and nine
months ended September 30, 2008, respectively. The Company recognized
stock-based compensation expense to non-employees of $0 and $1,706 for the three
and nine months ended September 30, 2007. The Company had no stock-based
compensation expense for board of directors for the three and nine months ended
September 30, 2007.
  Results
of Operations
  Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
  Research
and development expenses increased from approximately $815,000 for the three
months ended September 30, 2007 to approximately $2.7 million for the
corresponding 2008 period, primarily as a result of increased expenses incurred
in continuing development of the neuropathic pain compound and initiating the
development of the following new programs that the Company did not have in the
three months ended September 30, 2007: DB959, DB200 and DB900.
  General
and administrative expenses consist primarily of salaries and benefits,
professional fees related to administrative, finance, human resource, legal and
information technology functions and patent costs. In addition, general and
administrative expenses include allocated facility, basic operational and
support costs and insurance costs. General and administrative expenses increased
from approximately $775,000 for the three months ended September 30, 2007 to
approximately $1.3 million for the corresponding 2008 period, primarily as a
result of costs associated with being a public company.
  Other
(expense) income, net reflects non-operating activities associated with
investments and dispositions on investments made in collaborations with other
companies. Other (expense) income, net decreased from income of approximately
$197,000 for the three months ended September 30, 2007 to approximately $6,000
for the corresponding 2008 period. This fluctuation was due to the variance
in interest income earned.
  Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
  Research
and development expenses increased from approximately $2.2 million for the nine
months ended September 30, 2007 to approximately $6.2 million for the
corresponding 2008 period, primarily as a result of increased expenses incurred
in continuing development of the neuropathic pain compound and initiating the
development of the following new programs that the Company did not have in the
nine months ended September 30, 2007: DB959, DB200 and DB900.
  General
and administrative expenses consist primarily of salaries and benefits,
professional fees related to administrative, finance, human resource, legal and
information technology functions and patent costs. In addition, general and
administrative expenses include allocated facility, basic operational and
support costs and insurance costs. General and administrative expenses increased
from approximately $1.8 million for the nine months ended September 30, 2007 to
approximately $3.5 million for the corresponding 2008 period, primarily as a
result of the substantial expenses we incurred in the first quarter of 2008 in
connection with the Merger and becoming a public company, as well as an increase
of two employees, the increase in occupancy costs associated with the new office
facilities and the associated overhead.
  Other
(expense) income, net reflects non-operating activities having to do with
investments and dispositions on investments made in collaborations with other
companies. Other (expense) income, net decreased from approximately $4.9 million
for the nine months ended September 30, 2007 to approximately $115,000 for the
corresponding 2008 period. This decrease was primarily due to there being no
recognized gains on nonmonetary assets or from the sale of securities in the
nine months ended September 30, 2008 compared to recognizing (1) a gain on
nonmonetary assets of approximately $2,658,000 as a result of our distribution
of a dividend of shares of SurgiVision stock to stockholders and option holders
and (2) a gain from the sale of securities of approximately $1,773,000 as a
result of our sale of our remaining investment in Medivation, Inc. during the
nine months ended September 30, 2007.
  18
 Table of Contents
  Liquidity
and Capital Resources
  Overview
  From
inception through September 30, 2008, we have financed our operations primarily
from the net proceeds of (1) private placements of equity securities, through
which we raised approximately $23,295,000, and (2) the sale of securities held
in subsidiary companies, through which we raised approximately $5,650,000.
  At
September 30, 2008, our principal sources of liquidity were our cash and cash
equivalents which totaled approximately $1.1 million. As of September 30, 2008,
we had net working capital of approximately $1.2 million. Our cash resources
have been used to acquire licenses, fund research and development activities,
capital expenditures, and general and administrative expenses. Over the next
several years, we expect to incur substantial additional research and
development costs, including costs related to preclinical and clinical trials,
increased administrative expenses to support our research and development
operations and increased capital expenditures, and various equipment needs and
facility improvements. It should be noted that in accordance with applicable
accounting rules, our balance sheet at September 30, 2008 includes investment
securities available for sale of approximately $1.6 million. However, these
securities will not be freely saleable by us until February 2009.
  On
October 21, 2008, we entered into a Securities Purchase Agreement with certain
investors in connection with a registered direct offering (the “Offering”) of up
to 8,500,000 shares of the Company’s common stock and up to 13,600,000 warrants
(less 850,000 Class A Warrants to Gilford Securities, Inc., the placement
agent) to purchase shares of the Company’s common stock. The terms of the
Offering provide for the common stock and warrants to be sold in units for $1.00
per unit, with each unit consisting of (1) one share of common stock, (2) a
Class A Warrant to purchase one share of common stock for each unit purchased at
the greater of (a) the consolidated closing bid price on the NASDAQ Capital
Market on the trading day immediately preceding the applicable closing date plus
$.01 and (b) $1.30 or, if higher, the exercise price for Class A Warrants set at
an earlier closing and (3) a Class B Warrant to purchase one-half of a share of
common stock for each unit purchased at $2.25 per share. Class A Warrants are
exercisable beginning six months after the date of issuance and expire five
years after they first become exercisable. Class B Warrants are exercisable
beginning 12 months after the date of issuance and expire five years after they
first become exercisable. The shares of common stock and Warrants in the
Offering are being offered pursuant to an effective shelf registration statement
on Form S-3, which was initially filed with the SEC on April 9, 2008 and
declared effective on April 18, 2008 (File No.333-150150).
  The
Company sold 2,255,000 units at an initial closing that was completed on October
21, 2008 for cash proceeds (net of cash fees payable to the placement agent) of
$2,029,500. There can be no assurance that we will be able to sell any
additional units in the Offering. If any additional units are sold in the
Offering, they will be sold at a second closing and, if necessary, a third
closing. The Company anticipates using the net proceeds raised in the Offering
for working capital and other general corporate purposes, and possibly
acquisitions of other companies, products or technologies. Working capital and
other general corporate purposes may include research and development
expenditures and capital expenditures. Since the initial closing in the Offering
occurred after September 30, 2008, it is not reflected in the financial
statements in this Quarterly Report on Form 10-Q.
  Cash
Flows
  During
the nine month period ended September 30, 2008, our cash and cash equivalents
decreased by approximately $7.2 million from December 31, 2007. This decrease in
cash from operations was primarily due to the operating loss offset in part by
non-cash stock-based compensation of approximately $1.1 million and
depreciation of approximately $113,000. Prepaid expenses increased by
approximately $73,000 for the nine month period ended September 30, 2008,
primarily representing prepaid insurance coverage. Accounts payable increased by
approximately $592,000 and accrued expenses decreased by approximately $549,000
during the nine month period ended September 30, 2008.
  Our
investing activities provided net cash of approximately $755,000 for the nine
month period ended September 30, 2008 primarily as a result of cash of
approximately $772,000 received in connection with the Merger.
  We
generated approximately $189,000 of cash from financing activities for the nine
month period ended September 30, 2008.
  We
entered into a lease for new facilities in the first quarter of 2008. The new
facilities are approximately 7,520 square feet compared to our previous space of
4,038 square feet. In connection with this new lease, our annual lease costs
have increased by approximately $100,000.
  Financial
Condition
  We
believe we have sufficient working capital to pursue our current operations into
the first quarter of 2009. We will require additional funds to pursue our
business plan. Our working capital requirements will depend upon numerous
factors, including the progress of our research and development programs (which
may vary as product candidates are added or abandoned), preclinical testing and
clinical trials, timing and cost of seeking as well as the achievement of
regulatory milestones, the status of competitive programs, and the ability to
sell or license our technologies to third parties. In any event, we will require
substantial funds in addition to those presently available to develop all of our
programs to meet our business objectives. To ensure the continued level of
research development and funding of our operations, we are currently exploring
various possible financing options that may be available to us, which may
include a sale of our securities or the sale of certain of our investments. We
have no commitments to obtain any additional funds, and there can be no
assurance such funds will be available on acceptable terms or at all. If we are
unable to obtain such needed capital, we may not be able to:
 ●
              execute
      our growth plan;
 
 ●
              take
      advantage of future opportunities, including synergistic acquisitions;
      or
 
 ●
              continue
      to remain in operation.
 
 19
 Table of Contents
  Related
Party Transactions
  The
Company incurred expenses of approximately $15,200 during the nine months ended
September 30, 2008 related to aircraft usage from an entity owned by the
Co-Chairman of the Board.
  Off-Balance
Sheet Arrangements
  We have
no off-balance sheet arrangements as of September 30, 2008.
  Cautionary
Information regarding Forward-Looking Statements
  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.
These statements and expectations are based on currently available competitive,
financial and economic data along with our operating plans, and are subject to
future events and uncertainties that could cause anticipated events not to occur
or actual results to differ materially from historical or anticipated results.
Forward-looking statements may address the following subjects: results of
operations; development of drug candidates; operating expenses, including
research and development expense; capital resources and access to financing; and
results of clinical trials. 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 a result
of various factors, including, among others, the potential risks and
uncertainties described in our Annual Report on Form 10-K for the year ended
December 31, 2007 under Part I, Item 1A — Risk Factors.
 You
should also carefully consider the factors set forth in other reports or
documents that we file from time to time with the Securities and Exchange
Commission (the “SEC”). Except as required by law, we undertake no obligation to
update any forward-looking statements.
  In this
Form 10-Q, we refer to information regarding potential markets for our drug
candidates and other industry data. We believe that all such information has
been obtained from reliable sources that are customarily relied upon by
companies in our industry. However, we have not independently verified any such
information.
  Item 3. Quantitative and Qualitative Disclosures about Market
Risk
  Not
applicable
 
 Item 4. Controls and Procedures
  As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934, our
management, including our Chief Operating Officer and 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 Operating Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are 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. 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 Operating Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective at reaching that level of
reasonable assurance.
  As a
result of the Merger (described above in Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Merger Transaction), our
internal control over financial reporting was materially affected in that upon
the effective date of the Merger, DARA’s internal control over financial
reporting became ours. DARA was a private company and therefore was not subject
to Section 404 of the Sarbanes-Oxley Act of 2002 which requires companies to
include in their annual report an assessment of internal control over financial
reporting and the related auditor attestation report. We are in the process of
completing a work plan so that we may complete an evaluation of our internal
control over financial reporting as of December 31, 2008 and include our
internal control assessment in our Annual Report on Form 10-K for 2008.
  20
 Table of Contents
 PART II - OTHER INFORMATION
  Item 1. Legal Proceedings
  As of
November 13, 2008, we had no outstanding material legal proceedings.
  Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
  On
September 8, 2008 we entered into an investor relations and consulting services
agreement with Lyons Capital, LLC, an investor relations consultant, pursuant to
which we agreed as partial consideration for services to be rendered to us under
the agreement to issue to such firm 220,000 shares of our common stock. Such
shares were issued on September 30, 2008. These shares were issued upon the
exemption from the registration provisions of the Securities Act of 1933
provided for by Section 4(2) thereof for transactions not involving a public
offering. Use of this exemption is based on the following facts:
  ●
              Neither
      we nor any person acting on our behalf solicited any offer to buy or sell
      securities by any form of general solicitation or advertising.
  ●
              At
      the time of the purchase, Lyons Capital, LLC was an accredited investor,
      as defined in Rule 501(a) of the Securities Act.
  ●
              Lyons
      Capital, LLC has had access to information regarding DARA and is
      knowledgeable about us and our business affairs.
  ●
              All
      shares issued to Lyons Capital, LLC were issued with a restrictive legend
      and may only be disposed of pursuant to an effective registration or
      exemption from registration in compliance with federal and state
      securities laws.
  Under our
agreement with Lyons Capital, it agreed that it would (1) not sell any of these
shares during the six months following the effective date of the agreement and
(2) sell only up to 110,000 of these shares between the six and twelve month
anniversaries of the effective date of the agreement.
  Item 3. Defaults Upon Senior Securities
  Not
applicable.
  Item 4. Submission of Matters to a Vote of Security
Holders
  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.
  21
 Table of Contents
  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.
  DARA
      BIOSCIENCES, INC.Date:
      November 14, 2008
                By:
                /s/ John
      DidsburyName:
      John DidsburyTitle: President
      and Chief Operating Officer
 Date:
      November 14, 2008
                By:
                /s/ John C. Thomas,
      Jr.Name: John
      C.  Thomas, Jr.Title:
      Chief Financial Officer
  22
 Table of Contents
  EXHIBIT INDEX
 Item 15(c)
Exhibits:
  Exhibit
      No.
              Description31.
      1
              Certification of Principal Executive Officer pursuant to
      Section 302 of the Sarbanes Oxley Act of 200231.
      2
              Certification of Principal Financial Officer pursuant to
      Section 302 of the Sarbanes Oxley Act of 200232.
      1
              Certification of Principal Executive Officer pursuant to
      18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.
      2
              Certification of Principal Financial Officer 
      pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906
      of the Sarbanes-Oxley Act of
2002


23
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