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Table of Contents

 

 

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 June 30, 2011

or

 

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

For the transition period from              to             

Commission file number 000-23776

 

 

DARA BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3216862

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

8601 Six Forks Road, Suite 160  
Raleigh, North Carolina   27615
(Address of principal executive offices)   (Zip Code)

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

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

The number of shares outstanding of the Registrant’s common stock as of August 12, 2011 was approximately 5,170,004.

 

 

 


Table of Contents

Table of Contents

 

          Page  
PART I - FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

     3   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     17   

Item 4.

  

Controls and Procedures

     18   
PART II - OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     18   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     18   

Item 3.

  

Defaults Upon Senior Securities

     18   

Item 4.

  

(Removed and Reserved)

     18   

Item 5.

  

Other Information

     18   

Item 6.

  

Exhibits

     18   

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

DARA BIOSCIENCES, INC. AND SUBSIDIARIES

(a Development Stage Company)

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     June 30,
2011
    December 31,
2010
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 3,386,857      $ 5,478,414   

Prepaid expenses and other assets, current portion

     389,167        352,076   
  

 

 

   

 

 

 

Total current assets

     3,776,024        5,830,490   

Furniture, fixtures and equipment, net

     52,624        63,357   

Restricted cash

     38,541        51,401   

Prepaid expenses and other assets, net of current portion

     112,665        147,331   

Prepaid license fee, net

     160,000        220,000   

Investments

     130,468        130,468   
  

 

 

   

 

 

 

Total assets

   $ 4,270,322      $ 6,443,047   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 469,561      $ 349,741   

Accrued liabilities

     374,157        551,842   

Capital lease obligation, current portion

     14,204        13,217   
  

 

 

   

 

 

 

Total current liabilities

     857,922        914,800   

Deferred lease obligation

     11,084        12,054   

Other liability

     283,722        279,722   

Capital lease obligation, net of current portion

     24,049        31,412   

Patent obligation

     4,562        7,895   
  

 

 

   

 

 

 

Total liabilities

     1,181,339        1,245,883   

Stockholders’ equity:

    

Preferred stock, Series A, $0.01 par value, 1,000,000 shares authorized, 1,905 shares issued and outstanding at June 30, 2011, 3,675 shares issued and outstanding at December 31, 2010.

     19        37   

Common stock, $0.01 par value, 75,000,000 shares authorized, 5,170,004 shares issued and outstanding at June 30, 2011, 4,126,004 shares issued and outstanding as of December 31, 2010.

     51,700        41,260   

Additional paid-in capital

     39,472,572        38,610,457   

Deficit accumulated during the development stage

     (36,365,378     (33,545,960
  

 

 

   

 

 

 

Total stockholders’ equity before noncontrolling interest

     3,158,913        5,105,794   

Noncontrolling interest

     (69,930     91,370   
  

 

 

   

 

 

 

Total stockholders’ equity

     3,088,983        5,197,164   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,270,322      $ 6,443,047   
  

 

 

   

 

 

 

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

 

3


Table of Contents

DARA BIOSCIENCES, INC. AND SUBSIDIARIES

(a Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three months ended June 30,     Six months ended June 30,     Period from June 22,
2002 (inception)
through June 30, 2011
 
        
     2011     2010     2011     2010    

Operating expenses:

          

Research and development

   $ 994,458      $ 1,265,910      $ 1,390,850      $ 1,625,479      $ 23,991,902   

General and administrative

     669,314        835,470        1,591,965        1,624,092        24,189,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,663,772        2,101,380        2,982,815        3,249,571        48,181,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (1,663,772     (2,101,380     (2,982,815     (3,249,571     (48,181,540

Other income (expense):

          

Gain on distribution of nonmonetary asset

     —          —          —          —          4,760,953   

Gain on sale of marketable securities

     —          —          —          —          6,780,147   

Other (expense) income

     —          —          —          (160     606,972   

Interest income, net

     2,200        144        2,097        2,129        749,980   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     2,200        144        2,097        1,969        12,898,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before undistributed loss in equity method investments

     (1,661,572     (2,101,236     (2,980,718     (3,247,602     (35,283,488

Undistributed loss in equity method investments

     —          —          —          —          (2,374,422
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

     (1,661,572     (2,101,236     (2,980,718     (3,247,602     (37,657,910

Net loss attributable to noncontrolling interest

     90,803        73,382        161,300        123,682        1,511,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to controlling interest

   $ (1,570,769   $ (2,027,854   $ (2,819,418   $ (3,123,920   $ (36,146,031
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share

   $ (0.31   $ (0.66   $ (0.57   $ (1.05  
  

 

 

   

 

 

   

 

 

   

 

 

   

Shares used in computing basic and diluted net loss per common share

     5,100,114        3,094,111        4,912,076        2,978,385     
  

 

 

   

 

 

   

 

 

   

 

 

   

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

 

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Table of Contents

DARA BIOSCIENCES, INC. AND SUBSIDIARIES

(a Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six months ended
June 30,
    Period From
June  22,

2002
(inception)
through
June 30,
2011
 
    
    
    
    
     2011     2010    

Operating activities

      

Consolidated net loss

   $ (2,980,718   $ (3,247,602   $ (37,657,910

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation and amortization

     70,733        72,526        631,863   

Forgiveness of stock subscription receivable

     —          —          242,500   

Recognition of expense related to nonmonetary asset

     —          —          1,035,589   

Loss from equity investment

     —          —          2,374,422   

Accretion of debt discount

     —          —          406,359   

Share-based compensation

     310,037        386,697        5,452,574   

Expense of warrants issued with convertible notes

     —          —          4,860   

Expense of warrants issued to placement agent

     —          —          230,920   

Loss on disposal of capital assets

     —          —          19,930   

Gain on extinguishment of capital lease obligation

     —          —          (12,240

Loss on disposal of furniture, fixtures and equipment

     —          160        36,065   

Sale of investment as payment for interest expense

     —          —          36,712   

Distribution of investment for compensation

     —          —          100,000   

Gain on distribution of nonmonetary asset

     —          —          (4,760,953

Gain on sale of marketable securities

     —          —          (6,780,147

Deferred lease obligation

     (970     1,041        11,085   

Changes in operating assets and liabilities:

      

Prepaid license fee and other prepaid expenses

     (2,425     (126,019     (621,195

Accounts payable

     119,820        37,533        139,561   

Accrued liabilities

     (221,173     355,926        (396,029

Other liability

     4,000        5,700        46,174   
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (2,700,696     (2,514,038     (39,459,860

Investing activities

      

Purchases of furniture, fixtures, and equipment

     —          (4,151     (199,912

Proceeds from sale of furniture, fixtures, and equipment

     —          350        5,716   

Issuance of notes receivable

     —          —          (1,400,000

Proceeds from sale of marketable securities

     —          —          1,951,211   

Payments on notes receivable

     —          —          711,045   

Cash provided in the merger

     —          —          771,671   

Purchase of investments in affiliates

     —          —          (2,471,400

Proceeds from sale of investments

     —          —          4,405,692   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     —          (3,801     3,774,023   

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

 

5


Table of Contents

DARA BIOSCIENCES, INC. AND SUBSIDIARIES

(a Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

 

    

Six months ended

June 30,

    Period From
June  22,
2002
(inception)
through

June  30,
2011
 
    
    
    
    
     2011     2010    

Financing activities

      

Proceeds from issuance of notes payable

     —          —          605,000   

Principal payments on notes payable

     —          —          (255,000

Repayments of capital lease obligation

     (6,376     (3,855     (33,813

Establishment of other financing

     98,219        103,927        238,295   

Repayments on other financing

     (58,064     (60,466     (189,185

Proceeds from exercise of options and warrants

     562,500        100,000        1,041,855   

Proceeds from issuance of common stock and warrants, net of issuance costs

     —          1,666,615        37,704,083   

Establishment of restricted cash

     12,860        27,357        (38,541
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     609,139        1,833,578        39,072,694   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (2,091,557     (684,261     3,386,857   

Cash and cash equivalents at beginning of period

     5,478,414        3,167,302        —     
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,386,857      $ 2,483,041      $ 3,386,857   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of non-cash financing activity

      

Equipment purchased through financing

   $ —        $ —        $ 91,676   

Advances to stockholders for stock issued

     —          —          1,040   

Payable accrued for stock issuance

     —          —          350,000   

Note issued for stock issuance

     —          —          150,000   

Note issued for prepaid license fee

     —          —          1,000,000   

Note received for stock issuance

     —          —          (242,500

Stock received for consideration of outstanding loans

     —          —          (427,280

Forgiveness of stock subscription receivable

     —          —          242,500   

Shares issued to employees & non-employee directors

     118,647        166,130        622,616   

Shares issued to third party for services

     98,363        37,525        556,699   

Exchange of investment for cancellation of accrued interest

     —          —          36,712   

Exchange of investment for cancellation of note payable

     —          —          500,000   

Conversion of note into equity of subsidiary

     —          —          1,441,948   

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

 

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Table of Contents

DARA BIOSCIENCES, INC. AND SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The Company

DARA BioSciences, Inc. (the “Company” or “DARA”), headquartered in Raleigh, North Carolina, was incorporated on June 22, 2002. The Company is a development stage biopharmaceutical company that acquires therapeutic drug candidates for development and subsequent licensing or sale to biotechnology and pharmaceutical companies. The focus is primarily small molecules.

At the present time, the Company has two drug candidates with cleared IND (Investigational New Drug) Applications from the United States FDA which are advancing through clinical development. KRN5500 successfully completed a Phase 2a study. The second drug, DB959, successfully completed a Phase 1a study. The Company has incurred losses since inception through June 30, 2011 of $36,146,031 and expects to continue to incur losses and require additional financial resources to achieve monetization of its product candidates.

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, 2011.

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

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of DARA BioSciences, Inc. and its majority-owned subsidiaries: DARA Pharmaceuticals, Inc. (which is wholly owned by the Company), DARA Therapeutics, Inc. (which holds the Company’s assets related to its KRN5500 program and is owned 75% by the Company) and Point Therapeutics Massachusetts, 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.

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.

 

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Table of Contents

Investments

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

Furniture, Fixtures and Equipment

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

Research and Development Costs

The Company expenses research and development costs as incurred. Research and development costs include personnel and personnel related costs, costs associated with clinical trials, including amounts paid to contract research organizations and clinical investigators, 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 FASB ASC 718, Stock Compensation. For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award 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. See Note 5 for further information.

Income Taxes

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

Concentration of Credit Risk

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

Net Loss Per Common Share

The Company calculates its basic loss per share in accordance with FASB ASC 260, Earnings Per Share, by dividing the earnings or loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period less the weighted average unvested common shares subject to forfeiture and without consideration for common stock equivalents. Diluted loss per share is computed by dividing the loss applicable to common stockholders by the weighted-average number of common share equivalents outstanding for the period less the weighted average unvested common shares subject to forfeiture and dilutive common stock equivalents for the period determined using the treasury-stock method. For purposes of this calculation, options and warrants to purchase common stock are considered to be common stock equivalents but have been excluded for the three and six month periods ended June 30, 2011 and 2010 calculation of diluted net loss per share as their effect is anti-dilutive. For the period ended June 30, 2011, no options and 1,695,000 warrants have been excluded, because their inclusion would be anti-dilutive. Also, for the period ended June 30, 2010, 145,098 options and 1,027,226 warrants have been excluded, because their inclusion would be anti-dilutive.

 

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Recently Issued Accounting Pronouncements

The ASC includes guidance in ASC 605-25, Revenue Recognition-Multiple-Element Arrangements, related to the allocation of arrangement consideration to these multiple elements for purposes of revenue recognition when delivery of separate units of account occurs in different reporting periods. This guidance recently was modified by the final consensus reached on Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Recognition for a Single Unit of Accounting that was codified by Accounting Standards Update (ASU) 2009-13. This change increases the likelihood that deliverables within an arrangement will be treated as separate units of accounting, ultimately leading to less revenue deferral for many arrangements. The change also modifies the manner in which transaction consideration is allocated to separately identified deliverables. This guidance is effective prospectively for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of ASU 2009-13 did not have a material impact on the Company’s financial statements.

At the March 2010 meeting, the FASB ratified EITF Issue No. 08-9, Milestone Method of Revenue Recognition (EITF 08-9). The Accounting Standards Update resulting from EITF 08-9 amends ASC 605-28, Revenue Recognition – Milestone Method. The Task Force concluded that the milestone method is a valid application of the proportional performance model when applied to research or development arrangements. Accordingly, the consensus states that an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The milestone method is not required and is not the only acceptable method of revenue recognition for milestone payments. This guidance is effective prospectively for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of ASC 605-28 did not have a material impact on the Company’s financial statements.

3. Investments

MRI Interventions, Inc.

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

As of June 30, 2011 and December 31, 2010, the investment of 403,315 shares was carried at cost of $130,468. In addition, the Company is the holder of a warrant to acquire 101,250 shares of MRI Interventions common stock at an exercise price of $3.20 per share.

Cardiovascular Solutions, Inc.

Cardiovascular Solutions, formerly known as Medeikon Corporation, a privately-held company, is developing technology focusing on the diagnostics of vulnerable plaque using an optical detection system. The Company’s investment represents approximately 25.4% of the outstanding shares of Cardiovascular Solutions at June 30, 2011.

The Company’s share of Cardiovascular Solutions loss for the year ended December 31, 2006 exceeded its basis. The loss of a minority interest is limited to the extent of equity capital. Application of the equity method resulted in an equity method loss in Cardiovascular Solutions of $1,050,000 for the period from June 22, 2002 (inception) through June 30, 2011. The carrying value at June 30, 2011 and December 31, 2010 of the investment in Cardiovascular Solutions was $0.

The fair values of cost method investments (when applicable) are not estimated unless there are events or changes identified that may have a significant adverse effect on the fair value and such estimates of fair value could not be made without incurring excessive costs.

4. Stockholders’ Equity

For the three and six month periods ended June 30, 2011, no warrants and 225,000 warrants, respectively, from the December 2010 Series A convertible preferred stock and warrant investment round were exercised at $2.50 per warrant, respectively. For the three and six month periods ended June 30, 2011, 870 Series A Preferred shares were converted into 348,000 shares of common stock and 1,770 Series A Preferred shares were converted into 708,000 shares of common stock, respectively. There were no preferred shares during the three and six month periods ended June 30, 2010.

On February 26, 2010 and March 5, 2010, the Company entered into two Securities Purchase Agreements with certain accredited investors in connection with the private issuance and sale to such investors of a total of 234,896 shares of the Company’s common stock and 117,456 warrants to purchase shares of common stock. The common stock and warrants were sold in units for $7.52 per unit, with each unit consisting of one share of common stock and one-half of a warrant to purchase one share of common stock for each unit purchased. The closings of the sale of the units under these securities purchase

 

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agreements took place on February 26, 2010 and March 5, 2010 for proceeds of $1,759,545, net of issuance costs of $6,959. Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $7.52. Of these warrants, 114,131 expire on August 26, 2015 and 3,325 expire on September 5, 2015.

5. Share-based Compensation

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

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

 

     Three months ended
June 30, 2011
 

Expected dividend yield

     —  

Expected volatility

     80.24

Weighted-average expected life (in years)

     5.17   

Risk free interest rate

     2.30

Forfeiture rate

     10.0

The Company’s consolidated statements of operations for the three and six month periods ended June 30, 2011 and 2010, respectively, include the following share-based compensation expense related to issuances of stock options to employees and non-employee directors as follows:

 

     Three months ended June 30,      Six months ended June 30,  
     2011      2010      2011      2010  

Research and development

   $ 5,638       $ 17,782       $ 11,212       $ 27,714   

General and administration

     47,216         41,820         80,070         155,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation to employees and non-employee directors

   $ 52,854       $ 59,602       $ 91,282       $ 182,927   
  

 

 

    

 

 

    

 

 

    

 

 

 

In January 2011, the Company issued 66,000 shares of restricted stock to five employees which will vest 100% on the one year anniversary of the grant date. The Company’s President and CEO was awarded 50,000 restricted shares and four employees were each awarded 4,000 restricted shares. The Company recognized $49,598 and $6,841 stock-based compensation expense in general and administrative and research and development, respectively, during the three month period ended June 30, 2011. The Company recognized $98,652 and $13,607 stock-based compensation expense in general and administrative and research and development, respectively, during the six month period ended June 30, 2011. In September 2009, the Company issued 31,250 shares of restricted stock to the same employees which vested September 2010. The Company recognized $57,093 and $14,273 stock-based compensation expense in general and administrative and research and development, respectively, during the three month period ended June, 2010 and $113,559 and $28,389 stock-based compensation expense in general and administrative and research and development, respectively, during the six month period ended June, 2010.

On January 4, 2010, the Company issued 625 shares of restricted stock to each of two non-employee members of the board which vested one year from the date of issue, January 4, 2011. On February 9, 2010 the Company issued 208 shares of restricted stock to a non-employee member of the board which vested on January 4, 2011. As of June 30, 2011 all restricted stock issued to non-employee members of the board are vested. The Company recognized share-based compensation expense related to issuance of restricted stock to certain members of the board of directors in general and administrative expense of none and $6,388 for the three and six month periods ended June 30, 2011 and $12,104 and $24,182 for the three and six month periods ended June 30, 2010, respectively.

 

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

The Company recognized share-based compensation related to issuance of shares of restricted stock to non-employees (i.e. consultants) in exchange for services in general and administrative expense of none and $98,363 for the three and six month periods ended June 30, 2011 and $14,042 and $35,441 for the three and six month periods ended June 30, 2010, respectively.

The Company recognized share-based compensation expense related to issuance of stock options to non-employees (i.e. consultants) in exchange for services in general and administrative expense of $763 and $1,495 for the three and six month periods ended June 30, 2011 and $1,100 and $2,197 for the three and six month periods ended June 30, 2010, respectively.

In January 2010, the Company’s President and CEO exercised 25,000 stock options at $4.00 per share.

Unrecognized share-based compensation expense, including time-based options and, performance-based options expected to be recognized over an estimated weighted-average amortization period of 1.13 years was $166,552 at June 30, 2011 and over an estimated weighted-average amortization period of 2.33 years was $310,411 at June 30, 2010, respectively.

A summary of activity under the Company’s stock option plans for the three months ended June 30, 2011 is as follows:

 

           Options Outstanding  
     Shares Available
to grant
    Number of
Shares
Outstanding
     Weighted
Average
Exercise
Price
 

Balance at December 31, 2010

     357,812        145,098       $ 14.63   

Options authorized under the 2008 Plan

     723,359        —           —     

Shares issued as compensation

     (111,000     —           3.43   
  

 

 

   

 

 

    

 

 

 

Balance at March 31, 2011

     970,171        145,098         15.42   
  

 

 

   

 

 

    

 

 

 

Options granted

     (15,000     15,000         3.03   
  

 

 

   

 

 

    

 

 

 

Balance at June 30, 2011

     955,171        160,098       $ 13.54   
  

 

 

   

 

 

    

 

 

 

6. Commitments and Contingencies

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

7. Income Taxes

The Company did not record any current tax expense in the three and six month periods ended June 30, 2011 and 2010, respectively.

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 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 total balance of unrecognized liabilities at June 30, 2011 was $283,722 which was recorded in other liability and if recognized, would affect the effective tax rate for computing tax expense for the three and twelve month periods then ended, respectively. Consistent with prior periods, the Company accrued interest and penalties, if any, within its interest expense.

8. Subsequent Events

The Company has no material subsequent event to the Company’s Form 10-Q for the quarter ended June 30, 2011 requiring disclosure.

 

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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 and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2010, which has been filed with the Securities and Exchange Commission (the “SEC”).

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Form 10-Q, the words “believe,” “anticipates,” “intends,” “plans,” “estimates,” and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to factors that could cause actual results to differ materially for us from those projected. Those factors include risks and uncertainties relating to our current cash position and our need to raise additional capital in order to be able to continue to fund our operations, the potential delisting of our common stock from the NASDAQ Capital Market, our limited operating history which may make it difficult to evaluate our business and future viability, our ability to retain our managerial personnel and to attract additional personnel, our ability to successfully develop and outlicense our drug candidates as anticipated, the current regulatory environment in which we develop and sell our products, the market acceptance of those products, dependence on partners, successful performance under collaborative and other commercial agreements, potential product liability risks that could exceed our liability coverage, competition from other pharmaceutical companies, biotechnology companies and other research and academic institutions, the strength of our intellectual property, the intellectual property of others and other risk factors identified in the documents we have filed, or will file, with the SEC. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as result of various factors, including, among others, the potential risks and uncertainties described in the Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of our Annual Report on Form 10-K for the year ended December 31, 2010 and in any subsequently filed Quarterly Reports on Form 10-Q. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC. Except as required by law, we undertake no obligation to update any forward-looking statements.

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.

Overview

We are a North Carolina-based biopharmaceutical development company that acquires promising therapeutic molecules and medical technologies from third parties and advances their clinical development for later sale or license to pharmaceutical and biotechnology companies or other entities that have the potential to complete development, gain approval and commercialize the product. We focus our therapeutic development efforts on small molecules from late preclinical development through Phase 2 clinical trials. We operate a business model that focuses on the following:

 

   

Candidates that fill an important therapeutic need and have the potential to participate in large and growing markets;

 

   

Candidates with a well understood development pathway;

 

   

Patent portfolio;

 

   

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

 

   

Monetize the resulting product to a strong healthcare partner to complete development and commercialize.

We do not intend to fully develop, obtain clearance from the U.S. Food and Drug Administration (“FDA”) or market the drug candidates we are developing.

While in the past we had a broader pipeline of drug development programs, we are currently focusing all of our resources on our two most advanced drug development programs which are KRN550 for the treatment of neuropathic pain in cancer patients and DB959 for the treatment of metabolic diseases including type 2 diabetes. KRN5500 successfully completed a Phase 2a study, meeting its Primary Endpoints of reduction of pain and safety and performed statistically better than placebo (p=0.03). We plan to initiate a Phase 2b in conjunction with the National Cancer Institute (NCI) during 2011. The second drug DB959 successfully completed a Phase 1a study with a favorable safety profile. A Phase 1b is nearing completion and we expect to present results in the third quarter of 2011.

 

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We hire experts with strong pharmaceutical 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 biotechnology or 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 or otherwise acquire 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.). The first operational stage of development of our drug candidates is in-licensing, which we typically do at the pre-clinical stage of development. The next stage of development is to obtain FDA approval of an IND application and test the drug candidates in Phase 1 and Phase 2 clinical trials. Finally, we seek to license the drug candidate or find a strategic 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. Our primary source of working capital has been from the proceeds of investments made in other companies as well as capital raised from the sale of our securities. To date, we have received net proceeds from the sale of marketable securities assets in the amount of $1,951,211 and $4,405,692 in net proceeds from sale of investments in affiliates. We have raised $37,704,083 from issuance of preferred and common stock, net of issuance costs, since inception.

We expect to continue to incur operating losses in the near-term. 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 drug candidates for the treatment of neuropathic pain for patients with cancer, type II diabetes (including dyslipidemia), and symptoms of plaque psoriasis. Our cost containment program announced on January 6, 2009, designed to reduce our cash burn rate, necessitated that we focus most of our working capital on advancing our two lead programs; the continued development of KRN5500 for the treatment of neuropathic pain for patients with cancer and DB959 for the treatment of type II diabetes. Due to this allocation, we reduced our headcount by approximately 60 per cent and inventoried three programs, DB160, DB900 and DB200, for future development. Based on our present working capital and sharpened focus, we have sufficient working capital to advance KRN5500 and DB959 development through the first quarter 2012. In the event that these two candidates are not monetized during 2011, additional funding will be required to continue development. A brief discussion of the status of each of our drug candidates follows.

KRN5500

KRN5500 is a drug candidate which is presently being developed for the treatment of neuropathic pain in patients with cancer. An active component of KRN5500 has been shown to inhibit nerve cell pain signals. Initial in-vitro studies point to two possible modes of action, cholinesterase inhibition and the inhibition of fatty acid amide hydrolase (FAAH). Presently the primary segment of the market being targeted by this compound is chemotherapy-induced neuropathic pain (CINP). On May 12, 2009, we announced positive results from the completed Phase 2a clinical trial in cancer patients with neuropathic pain to assess the safety and efficacy of KRN5500. KRN5500 met its primary end-point of reduction of pain from baseline and performed statistically significantly better than placebo (p=0.03). On April 27, 2010 our subsidiary, DARA Therapeutics, Inc., entered into an agreement with the National Cancer Institute, an agency of the U.S. Government, for the further clinical development of KRN5500 focusing on the treatment and prevention of chemotherapy Induced Peripheral Neuropathy. Phase 2b clinical trial(s) are planned to start during 2011. On November 2, 2010, we received a federal grant to further the development of KRN5500. As previously reported, we have engaged in preliminary discussions regarding the outlicense of KRN5500. However, based on market and other factors, we currently plan to defer further discussions regarding the outlicense of KRN5500 until completion of the next Phase 2a clinical trial(s).

We incurred $200,244 and $258,327 in development costs associated with the development of KRN5500 during the three and six month periods ended June 30, 2011, respectively, and we have incurred costs of $4,489,751 from inception to date. We estimate the market potential for KRN5500 for chemotherapy-induced neuropathy to be roughly $2.5 billion at peak sales year.

 

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DB959

DB959 is a novel dual PPARd/g agonist for the treatment of type 2 diabetes. In March 2009, the FDA cleared our IND application for DB959. Preclinical studies showed efficacy in animal models for diabetes and dyslipidemia. A recently completed Phase 1a study demonstrated that the drug was well tolerated at all doses. A Phase 1b study started during March 2011 and we expect to report results during the third quarter of 2011. 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.

Our development work on DB959 is being conducted under an exclusive worldwide license to develop and commercialize the drug candidate from Bayer Pharmaceuticals Corp. This license, which was acquired in October 2007, gives us 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 costs of $643,527 and $822,313 during the three and six month periods ended June 30, 2011, respectively, and we have incurred costs of $6,877,794 from inception to date. We estimate the market potential for the PPAR agonist segment of type 2 Diabetes market to be roughly $21 billion in 2034.

Based on recently published literature, we are exploring the PPARs in our library for the treatment of Alzheimer’s disease, ulcerative colitis, Multiple sclerosis (MS), non-alcoholic liver disease, and other autoimmune diseases.

DB160

DB160 is a dipeptidylpeptidase (DPPIV) inhibitor for the treatment of type 2 diabetes. DDPIV 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. Prior to the implementation of our January 2009 cost reduction plan, we were developing this drug candidate as a once-daily oral therapy. We have currently suspended the development of DB160, but we will continue to evaluate the competitive environment for DB160 and potential positioning of the compound for other indications. If our evaluation concludes that further development is warranted, the next step in our development of this candidate would be to file an IND application with the FDA. Our development work with DB160 is pursuant to an exclusive worldwide license to develop and commercialize the drug candidate from Nuada, LLC.

We incurred $4,870 and $20,368 in direct outside development costs associated with the development of DB160 during the three and six month periods ended June 30, 2011, respectively, and we have incurred costs of $2,352,226 from inception to date. We estimate the market potential for the DPP-IV inhibitor segment of the type 2 diabetes market to be roughly $21 billion in 2034.

On August 4, 2009, we announced collaboration with America Stem Cell to expand on observations from recent preclinical studies showing that DPPIV inhibitors improve the efficiency of hematopoietic stem cell (HSC) transplants. On October 12, 2009, we entered into an Addendum and First Amendment to Material Transfer Agreement with America Stem Cell, Inc. pursuant to which the Material Transfer Agreement between the Company and America Stem Cell was amended. Under the Material Transfer Agreement, the Company is providing America Stem Cell with DPPIV inhibitors from our proprietary library which America Stem Cell is using to further its research and development program related to HSC transplants.

Under the Material Transfer Agreement as amended, America Stem Cell is required to pay us a total of $250,000, in four equal installments over approximately three years, contingent upon America Stem Cell’s receipt of a specified amount of grant funding for its HSC research and development program.

DB900

DB900 is a series of compounds which are PPARg/a/d agonists for the treatment of type 2 diabetes. These compounds activate genes involved in the metabolism of sugars and fats thereby improving the body’s ability to regulate blood sugar. 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. Should we decide to resume the development of DB900, a clinical candidate will be selected from a number of strong lead compounds. Our development work with DB900 is pursuant to an exclusive worldwide license to develop and commercialize the drug candidate from Bayer Pharmaceuticals Corp.

 

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We incurred $0 in direct outside development costs associated with the development of DB900 series compounds during the three and six month periods ended June 30, 2011, and we have incurred costs of $129,272 from inception to date. We estimate the market potential for the PPAR agonist segment of type 2 Diabetes market to be roughly $30.0 billion in 2014.

DB200

DB200 refers to a series of compounds that 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. Should development of DB200 resume, a clinical candidate will 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. Should we decide to resume the development of DB200, the next step in the process would be to file an IND application with the FDA. There are no third party licenses associated with this program.

We incurred $17,489 and $39,959 in direct outside development costs associated with the development of DB200 series compounds during the three and six month periods ended June 30, 2011, respectively, and we have incurred costs of $421,241 from inception to date. We estimate the market potential for the topical agent segment of the psoriasis market to be roughly $3.9 billion in 2011.

Talabostat

We have no current plans to develop Talabostat as a therapy for lung cancer, the original indication for which it was studied at Point Therapeutics. However, as we continue to receive requests for Talabostat material for other investigations, we recognize value in maintaining the patent estate, as potential future uses for this drug may be identified as a result of these other investigations. Therefore, we continue to keep these filings current by paying the various patent-related fees which become due.

We incurred $20,479 and $27,817 in direct costs associated with Talabostat during the three and six month periods ended June 30, 2011, respectively, and we have incurred costs of $135,708 from inception to date.

Critical Accounting Policies and Significant Judgments and Estimates

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

Research and Development Expenses

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

Accrued Expenses

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

 

   

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

 

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fees paid to investigative sites in connection with clinical trials;

 

   

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

 

   

professional service fees.

Share-Based Compensation

Share-based compensation is accounted for using the fair value based method prescribed by Financial Accounting Standards Board Accounting Standards Codification 718, Compensation-Stock Compensation. For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. Our Company’s share-based compensation transactions for employees and non-employee directors resulted in compensation expense of $109,293 and $143,073 for the three months ended June 30, 2011 and 2010, respectively, and $209,929 and $349,058 for the six month period ended June 30, 2011 and 2010, respectively. The Company recognized stock-based compensation expense for awards to consultants for services totaling $763 and $15,142 for the three month period ended June 30, 2011 and 2010, respectively, and $99,858 and $37,638 for the six month period ended June 30, 2011 and 2010, respectively.

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

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

Results of Operations

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Research and development expenses decreased $271,452 from $1,265,910 for the three months ended June 30, 2010 to $994,458 for the corresponding 2011 period, primarily as a result of the progress in the clinical development of DB959 and the formulation of KRN5500. In 2010 a Phase 1a study demonstrated that DB959 was well tolerated at all doses. The Company initiated a Phase 1b study during March 2011 and the Company expects to report results of the Phase 1b study during the third quarter of 2011.

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 decreased $166,156 from $835,470 for the three months ended June 30, 2010 to $669,314 for the corresponding 2011 period, primarily as a result of expenses associated with our capital raise activities in 2010 in addition to reduced general and administrative expenses.

Other income (expense), net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations. Other income (expense), net increased $2,056 from an income of $144 for the three months ended June 30, 2010 to an income of $2,200 for the corresponding 2011 period.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Research and development expenses decreased $234,629 from $1,625,479 for the six months ended June 30, 2010 to $1,390,850 for the corresponding 2011 period, primarily as a result of the progress in the clinical developmental phase for DB959.

General and administrative expenses decreased $32,127 from $1,624,092 for the six months ended June 30, 2010 to $1,591,965 for the corresponding 2011 period, primarily as a result of reduced general and administrative expenses.

 

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Other income (expense), net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations. Other income (expense), net increased $128 from an income of $1,969 for the six months ended June 30, 2010 to an income of $2,097 for the corresponding 2011 period.

Liquidity and Capital Resources

Overview

From inception through June 30, 2011, we have financed our operations primarily from the net proceeds of (1) registered direct offerings and private placements of equity securities, through which we raised $37,704,083 in net proceeds, and (2) the sale of securities we held in subsidiary companies and marketable securities, through which we raised $6,356,903.

At June 30, 2011, our principal sources of liquidity were our cash and cash equivalents which totaled $3,386,857. As of June 30, 2011, we had net working capital of $2,918,102. Our cash resources have been used to acquire licenses, and to fund research and development activities, capital expenditures, and general and administrative expenses.

Cash Flows

During the six month period ended June 30, 2011, cash used in our operating activities was $2,700,696. Cash used in operating activities was primarily due to the operating loss offset in part by non-cash stock-based compensation of $310,037 and depreciation and amortization of $70,733. Prepaid expenses decreased minimally by $2,425 for the six month period ended June 30, 2011. Accounts payable increased by $119,820 and accrued liabilities decreased by $221,173.

We had no investing activities during the six month period ended June 30, 2011.

We generated $562,500 of net cash from the exercise of 60,000 Series A Class A warrants and 165,000 Series A Class B warrants during the six month period ended June 30, 2011. We established $98,219 in other financing offset by payments of $58,064 on capital lease and other financing agreements during the six months ended June 30, 2011.

Financial Condition

We believe we have sufficient working capital to reach our next value milestones or through the first quarter of 2012. 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 equity securities or the sale of certain of our investments. However, we have no binding commitments for any transactions at this time and there can be no assurance that 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:

 

   

continue the development of our two active drug development programs;

 

   

resume development of any of our currently inactive drug development programs;

 

   

successfully out-license or otherwise monetize any of our programs; or

 

   

continue operations.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2011.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Accounting Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in Securities and Exchange Commission rules and forms and that material information relating to the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.

Changes in Internal Control Over Financial Reporting

During the second quarter of 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

As of August 12, 2011, we had no outstanding material legal proceedings.

 

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

Not applicable.

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. (Removed and Reserved).

 

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.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 12, 2011.

 

  DARA BIOSCIENCES, INC.
Date: August 12, 2011   By:  

/s/ Richard A. Franco

    Richard A. Franco
    President and Chief Executive Officer
Date: August 12, 2011   By:  

/s/ Ann A. Rosar

    Ann A. Rosar
    Chief Accounting Officer

 

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EXHIBIT INDEX

 

Exhibit
No.

 

Description

 

Incorporated by Reference to

31.1   Certification of Richard A. Franco, Sr., R.Ph. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011  
31.2   Certification of Ann A. Rosar pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011  
32   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011  
101   Interactive Data Files  

 

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