Midatech Pharma US Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Midatech Pharma US Inc.	Financial_Report.xls
EX-32 - CERTIFICATION - Midatech Pharma US Inc.	dara_ex32.htm
EX-31.2 - CERTIFICATION - Midatech Pharma US Inc.	dara_ex312.htm
EX-31.1 - CERTIFICATION - Midatech Pharma US Inc.	dara_ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

_______________________

(Mark One)

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

For the quarterly period ended June 30, 2013

£	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 R No £

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

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

Large accelerated filer £

Accelerated filer £

Non-accelerated filer £

Smaller reporting company R

(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 £ No R

The number of shares outstanding of the Registrant’s common stock as of August 13, 2013 was approximately 25,000,961.

Table of Contents

		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements - Unaudited		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		25
Item 4.	Controls and Procedures		25

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3.	Defaults Upon Senior Securities		26
Item 4.	Mine Safety Disclosures.		26
Item 5.	Other Information		26
Item 6.	Exhibits		26

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DARA BIOSCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	4,940,899		$	6,496,457
Investment-available-for-sale, at fair value		–			96,346
Accounts receivable		146,817			173,382
Inventory		151,233			125,275
Prepaid expenses and other assets, current portion		327,200			153,367
Total current assets		5,566,149			7,044,827

Furniture, fixtures and equipment, net		51,505			50,190
Restricted cash		12,879			12,875
Prepaid expenses and other assets, net of current portion		–			54,439
Intangible assets, net		3,532,549			3,708,569
Goodwill		821,210			821,210
Total assets	$	9,984,292		$	11,692,110

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	626,079		$	1,382,881
Accrued liabilities		441,318			326,713
Accrued compensation		90,000			172,250
Deferred revenue		190,622			149,848
Capital lease obligation, current portion		3,568			7,170
Total current liabilities		1,351,587			2,038,862

Deferred lease obligation		60,568			40,865
License milestone liability, non-current		630,049			599,446
Capital lease obligation, net of current portion		18,094			19,962

Total liabilities		2,060,298			2,699,135

Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized at June 30, 2013
and December 31, 2012.
Series A Preferred stock, 4,800 shares designated,
828 shares issued and outstanding at June 30, 2013, and December 31, 2012.		8			8
Series B2 Preferred stock, 15,000 shares designated,
50 shares issued and outstanding at June 30, 2013,
1,110 shares issued and outstanding at December 31, 2012.		1			11
Series B3 Preferred stock, 2,550 shares designated,
0 shares issued and outstanding at June 30, 2013, and December 31, 2012.		–			–
Series B4 Preferred stock, 250 shares designated,
250 shares issued and outstanding at June 30, 2013,
0 shares issued and outstanding at December 31, 2012.		3			–
Common stock, $0.01 par value, 75,000,000 shares authorized,
25,000,961 shares issued and outstanding at June 30, 2013,
18,947,094 shares issued and outstanding at December 31, 2012,		250,010			189,471
Accumulated other comprehensive income, net of taxes		–			45,469
Additional paid-in capital		60,680,254			56,430,227
Accumulated deficit		(52,104,370	)		(47,027,581	)

Total stockholders’equity before noncontrolling interest		8,825,906			9,637,605
Noncontrolling interest		(901,912	)		(644,630	)

Total stockholders' equity		7,923,994			8,992,975

Total liabilities and stockholders’ equity	$	9,984,292		$	11,692,110

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

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DARA BIOSCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012

Net product revenues	$	76,936		$	–		$	98,116		$	–
Cost of products sold		8,754			–			26,261			–
Gross margin		68,182			-			71,855			-

Operating expenses:
Sales and marketing		887,596			333,026			1,585,151			408,292
Research and development		508,905			546,215			1,193,401			862,051
General and administrative		1,251,737			847,100			2,445,012			2,334,086
Depreciation and amortization of intangibles		156,156			172,464			311,923			341,692
Total operating expenses		2,804,394			1,898,805			5,535,487			3,946,121
Loss from operations		(2,736,212	)		(1,898,805	)		(5,463,632	)		(3,946,121	)

Other income (expense):
Gain on sale of marketable securities and nonmonetary assets		–			–			71,712			–
Other income, net		81,776			–			119,966			–
Interest (expense) income, net		(15,879	)		3,057			(33,533	)		3,047
Other income		65,897			3,057			158,145			3,047

Net loss before income tax expense		(2,670,315	)		(1,895,748	)		(5,305,487	)		(3,943,074	)
Income tax benefit (expense)		–			322,715			(28,584	)		322,715
Consolidated net loss		(2,670,315	)		(1,573,033	)		(5,334,071	)		(3,620,359	)
Loss attributable to noncontrolling interest		116,111			100,512			257,282			163,962
Loss attributable to controlling interest	$	(2,554,204	)	$	(1,472,521	)	$	(5,076,789	)	$	(3,456,397	)

Basic and diluted net loss per common share
attributable to controlling interest	$	(0.10	)	$	(0.14	)	$	(0.21	)	$	(0.41	)

Shares used in computing basic and diluted net loss per
common share		25,000,961			10,159,163			23,990,576			8,482,078

Comprehensive Loss:
Consolidated net loss	$	(2,670,315	)	$	(1,573,033	)	$	(5,334,071	)	$	(3,620,359	)
Other comprehensive income (loss)
Unrealized gain (loss) on investments available for sale		-			836,049			(2,341	)		836,049
Reclassification adjustments for gains included in net loss		-			-			(71,712	)		-
Income taxes related to other comprehensive income (loss)		-			(322,715	)		28,584			(322,715	)
Other comprehensive income (loss), net of tax		-			513,334			(45,469	)		513,334
Comprehensive Loss		(2,670,315	)		(1,059,699	)		(5,379,540	)		(3,107,025	)
Comprehensive loss attributable to noncontrolling interest		116,111			100,512			257,282			163,962
Comprehensive loss attributable to controlling interest	$	(2,554,204	)	$	(959,187	)	$	(5,122,258	)	$	(2,943,063	)

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

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DARA BIOSCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months Ended June 30,
	2013			2012
Operating activities
Consolidated net loss	$	(5,334,071	)	$	(3,620,359	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization		311,923			341,692
Deferred income tax expense (benefit)		28,584			(322,715	)
Accretion of debt discount and other		33,677			–
Share-based compensation		573,731			290,611
Gain on sale of investments		(71,712	)		–
Deferred lease obligation		19,703			4,523
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		26,565			(101,448	)
Inventory		(25,958	)		–
Prepaid expenses and other assets		47,078			85,821
Accounts payable and accrued liabilities		(891,402	)		(144,925	)
Net cash used in operating activities		(5,281,882	)		(3,466,800	)

Investing activities
Purchases of furniture, fixtures and equipment		(12,218	)		(16,964	)
Cash received in the Oncogenerix merger		–			10,632
Purchase of investments in affiliates		–			(29,919	)
Proceeds from sale of investments		94,005			–
Net cash provided by (used in) investing activities		81,787			(36,251	)

Financing activities
Repayments of capital lease obligation		(5,470	)		(7,362	)
Repayments on other financing		(86,817	)		(63,458	)
Proceeds from exercise of options and warrants		1,221,099			–
Proceeds from issuance of preferred stock, common stock,
and warrants, net of issuance costs		2,515,729			10,743,968
Change in restricted cash		(4	)		(10	)
Net cash provided by financing activities		3,644,537			10,673,138

Net (decrease) increase in cash and cash equivalents		(1,555,558	)		7,170,087

Cash and cash equivalents at beginning of period		6,496,457			1,179,157
Cash and cash equivalents at end of period	$	4,940,899		$	8,349,244

Supplemental disclosure of non-cash financing activity
Common stock and contingent consideration issued in Oncogenerix merger		–			2,764,109
Shares issued to third party for services		–			74,210

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

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DARA BIOSCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

Six Months ended June 30, 2013

																																				Stockholders’
																																	Accumulated			Equity
	Series A				Series B-2						Series B-3						Series B-4										Additional						Other			Before						Total
	Convertible				Convertible						Convertible						Convertible										Paid-In			Accumulated			Comprehensive			Noncontrolling			Noncontrolling			Stockholders’
	Preferred Stock				Preferred Stock						Preferred Stock						Preferred Stock				Common Stock						Capital			Deficit			Income			Interest			Interest			Equity
	Shares		Amount		Shares			Amount			Shares			Amount			Shares		Amount		Shares			Amount


Balance at December 31, 2012		828	$	8		1,110		$	11			–		$	–			–	$	–		18,947,094		$	189,471		$	56,430,227		$	(47,027,581	)	$	45,469		$	9,637,605		$	(644,630	)	$	8,992,975

Share-based compensation		–		–		–			–			–			–			–		–		40,000			400			573,331			–			–			573,731			–			573,731
Issuance of B-3 and B-4 preferred stock, net of issuance costs of $284,272												2,550			26			250		3								2,515,700									2,515,729						2,515,729
Retirement of stock																						(200,000	)		(2,000	)		2,000									–						–
Issuance of common stock from exercise of warrants		–		–		–			–			–			–			–		–		1,463,874			14,639			1,206,460			–						1,221,099			–			1,221,099
Conversion of preferred stock to common stock		–		–		(1,060	)		(10	)		(2,550	)		(26	)		–		–		4,749,993			47,500			(47,464	)		–						–			–			–
Net change in unrealized gain on investments available-for-sale, net of taxes																																		(45,469	)		(45,469	)					(45,469	)
Net loss		–		–		–			–			–			–			–		–		–			–			–			(5,076,789	)		–			(5,076,789	)		(257,282	)		(5,334,071	)

Balance at June 30, 2013		828	$	8		50		$	1			–		$	-			250	$	3		25,000,961		$	250,010		$	60,680,254		$	(52,104,370	)	$	-		$	8,825,906		$	(901,912	)	$	7,923,994

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

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DARA BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The Company

DARA BioSciences, Inc. (the “Company”), headquartered in Raleigh, North Carolina is a specialty pharmaceutical company primarily focused on the commercialization of oncology treatment and oncology supportive care pharmaceutical products. Through its acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, the Company acquired exclusive U.S. marketing rights to its first commercial, FDA-approved proprietary product Soltamox® (tamoxifen citrate) oral solution. Soltamox has been approved by the U.S. Food and Drug Administration (“FDA”) for the prevention and treatment of breast cancer. On September 12, 2012 the Company entered into a license agreement with Helsinn Healthcare SA (“Helsinn”) to distribute, promote, market and sell Gelclair®, a unique oral gel whose key ingredients are polyvinylpyrrolidone (PV) and sodium hyaluronate (hyaluronic acid), for the treatment of certain approved indications in the U.S. Gelclair is an FDA-cleared product indicated for the treatment of oral mucositis. In addition, the Company has a marketing agreement with Innocutis Holdings, LLC pursuant to which it promotes Bionect® (hyaluronic acid sodium salt, 0.2%) within the U.S. oncology and radiation oncology marketplace. Bionect has been cleared by the FDA for the management of irritation of the skin as well as first and second degree burns.

The Company has a clinical development asset, KRN5500, which is a Phase 2 product candidate targeted for treating cancer patients with painful treatment-refractory chronic chemotherapy induced peripheral neuropathy (CCIPN). KRN5500 has been designated a Fast Track Drug by the FDA. The Company is looking to partner the drug with an established oncology development company to undertake and support further development costs.

As part of the Company’s strategic plan to focus on the commercialization of oncology treatment and oncology supportive care products, on June 17, 2013, the Company granted T3D Therapeutics, Inc. (T3D) the exclusive worldwide rights to develop and commercialize DB959, an oral, highly selective, dual PPAR (peroxisome proliferator activated receptor) nuclear receptor agonist, which it had previously developed through Phase 1 clinical trials for the treatment of diabetes and dyslipidemia. Pursuant to the Company’s agreement with T3D, it received $250,000 in connection with the execution of the agreement and is to be paid another $250,000 no later than December 20, 2013. The Company intends to use these license fees to eliminate $500,000 in existing liabilities associated with DB959. The Company is also entitled to receive certain milestone payments upon achievement of certain development milestones by T3D.

The Company launched Soltamox in the U.S. in late October 2012 and subsequently launched its second product, Gelclair in April 2013. Since inception, the Company had been in the development stage as defined by FASB Accounting Standards (“ASC”), 915, Development Stage Entities. With the launch of Soltamox and the commencement of principal operations, the Company is no longer considered to be in the development stage and the financial statement presentation has been modified accordingly. In the near-term, the Company’s ability to generate revenues is substantially dependent upon sales of Soltamox and Gelclair in the U.S. Based on the Company’s current operating plan, the Company believes that its existing cash, cash equivalents and marketable securities provides for sufficient resources to fund its currently planned operations through the end of 2013.

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

Unaudited Interim Financial Statements

The accompanying unaudited interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable Securities and Exchange Commission (“SEC”) regulations for interim financial information. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary to present fairly the consolidated balance sheets, consolidated statements of operations, consolidated statements of cash flows, and consolidated statement of stockholders’ equity 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, 2013.

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.

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The consolidated balance sheet at December 31, 2012 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012. References to “we”, “us”, “our”, or the “Company” refer to DARA BioSciences, Inc.

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

Use of Estimates

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

Cash and Cash Equivalents

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

Investments

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

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

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

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

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

Fair Value Measures

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

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

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

Level 3 Inputs – Instruments with primarily unobservable value drivers.

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

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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 cash deposits with a federally insured bank that may at times exceed federally insured limits. The majority of funds in excess of the federally insured limits are held in sweep investment accounts collateralized by the securities in which the funds are invested. As of June 30, 2013 and December 31, 2012, the Company had bank balances of $4,698,666 and $6,290,795, respectively, in excess of federally insured limits of $250,000 held in non-investment accounts. In addition, our top three customers, Cardinal Health, McKesson Corporation, and Amerisource Bergen Corporation, represented 92% of our gross trade accounts receivable as of June 30, 2013.

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.

Sales and Marketing Costs

Sales and marketing costs consist of salaries, commissions, and benefits to sales and marketing personnel, sales personnel travel and operating costs, marketing programs, co-pay assistance and administration costs and advertising costs.

Research and Development Costs

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

Goodwill and Intangible Assets

Acquired businesses are accounted for using the acquisition method of accounting, which requires that assets acquired, including identifiable intangible assets, and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. If the acquired net assets do not constitute a business, the transaction is accounted for as an asset acquisition and no goodwill is recognized. Other purchases of intangible assets, including product rights, are recorded at cost.

Product rights are amortized over the estimated useful life of the product or the license agreement term on a straight-line or other basis to match the economic benefit received. Amortization begins once product rights are secured. The Company evaluates its product rights on an ongoing basis to determine whether a revision to their useful lives should be made. This evaluation is based on its projection of the future cash flows associated with the products. As of June 30, 2013 and December 31, 2012, the Company had an aggregate of $3.5 million and $3.7 million, respectively, in capitalized product rights, which it expects to amortize over remaining periods of approximately 5.1 to 9.3 years.

Goodwill is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate potential impairment. The Company’s goodwill evaluation is based on both qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying value. The Company assesses qualitative factors to determine if its sole reporting unit’s fair value is more likely than not to exceed its carrying value, including goodwill. In the event the Company determines that it is more likely than not that its reporting unit’s fair value is less than its carrying amount, quantitative testing is performed comparing recorded values to estimated fair values. If the fair value exceeds the carrying value, goodwill is not impaired. If the carrying value exceeds the fair value, an impairment charge is recognized through a charge to operations based upon the excess of the carrying value of goodwill over the implied fair value. The Company performs its evaluation of goodwill annually. There was no impairment to goodwill recognized during the three and six months ended June 30, 2013.

The Company evaluates the recoverability of its intangible assets subject to amortization and other long-lived assets whenever events or changes in circumstances suggest that the carrying value of the asset or group of assets is not recoverable. The Company measures the recoverability of assets by comparing the carrying amount to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment charge equals the amount by which the carrying amount of the assets exceeds the fair value. Any write-downs are recorded as permanent reductions in the carrying amount of the assets.

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Revenue Recognition

The Company recognizes sales revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonably assured and the price is fixed or determinable The Company sells mostly to wholesalers who, in-turn, sell the product to hospitals and other end-user customers. Sales to wholesalers provide for selling prices that are fixed on the date of sale, although the Company offers certain discounts to group purchasing organizations and governmental programs. The wholesalers take title to the product, bear the risk of loss of ownership, and have economic substance to the inventory.

The Company allows for product to be returned beginning prior to and following product expiration. The Company does not believe it has sufficient experience with the product and the related wholesaler distribution channel at this time to reasonably estimate product returns from its wholesalers while the wholesalers are still holding the inventory. Therefore, the Company is deferring the recognition of revenue until the wholesalers sell their product to retail and specialty pharmacies or other end-user customers. It will continue to defer revenue recognition until the point at which it has obtained sufficient sales history to reasonably estimate returns from the wholesalers and inventory levels are reduced to normalized amounts. Shipments of product that are not recognized as revenue are treated as deferred revenue until evidence exists to confirm that pull through sales to hospitals or other end-user customers have occurred. Revenue is recognized from product sales directly to hospitals, clinics, and pharmacies when the merchandise is shipped.

The Company recognizes sales allowances as a reduction of revenues in the same period the related revenue is recognized. Sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with wholesale distributors and the levels of inventory within the distribution channels that may result in future discounts taken. The Company must make significant judgments in determining these allowances. If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future, which could have an effect on revenue in the period of adjustment. The following briefly describes the nature of each provision and how such provisions are estimated

●	Payment discounts are reductions to invoiced amounts offered to customers for payment within a specified period and are estimated upon shipment utilizing historical customer payment experience.

●

The returns provision is based on management's return experience for similar products and is booked as a percentage of product sales recognized during the period. These recognized sales include shipments that have occurred out of wholesalers as well as direct shipments made by the Company to other third party purchasers. As the Company gains greater experience with actual returns related to its specific products the returns provisions and related reserves will be adjusted accordingly. The returns reserve is recorded as a reduction of revenue in the same period the related product sales revenue is recognized and is included in accrued expenses.

●

Generally, credits may be issued to wholesalers for decreases that are made to selling prices for the value of inventory that is owned by the wholesaler at the date of the price reduction. Price adjustment credits are estimated at the time the price reduction occurs and the amount is calculated based on the level of the wholesaler inventory at the time of the reduction.

●

There are arrangements with certain parties establishing prices for products for which the parties independently select a wholesaler from which to purchase. Such parties are referred to as indirect customers. A chargeback represents the difference between the sales invoice price to the wholesaler and the indirect customer's contract price, which is lower. Provisions for estimating chargebacks are calculated primarily using historical chargeback experience, contract pricing and sales information provided by wholesalers and chains, among other factors. The Company recognizes chargebacks in the same period the related revenue is recognized.

Share-Based Compensation Valuation and Expense

Share-based compensation for stock and stock-based awards issued to employees and non-employee directors, is accounted for using the fair value method prescribed by FASB ASC 718, Stock Compensation, and, is recorded as a compensation charge based on the fair value of the award on the date of grant. Share based compensation for stock and stock-based awards issued to non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments is accounted for using the fair value method prescribed by FASB ASC 505-50, Equity-Based Payment to Non-Employees, and is recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. See Note 7 for further information.

Comprehensive Loss

The Company’s comprehensive loss consists of net loss and other comprehensive income unrealized gains and losses on available-for-sale investments. The Company displays comprehensive income and its components as part of the consolidated statements of net loss and comprehensive loss and in its consolidated statements of shareholder equity.

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Income Taxes

The Company uses the liability method in accounting for income taxes as required by FASB ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry forwards and for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. At June 30, 2013 and December 31, 2012 a valuation allowance has been recorded to reduce the net deferred tax asset to zero.

The Company's policy for recording interest and penalties is to record them as a component of interest income (expense), net.

Net Loss Per Common Share

The Company calculates its basic loss per share in accordance with FASB ASC 260, Earnings Per Share, by dividing the earnings or loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period less the weighted average unvested common shares subject to forfeiture and without consideration for common stock equivalents. Diluted loss per share is computed by dividing the loss applicable to common stockholders by the weighted-average number of common share equivalents outstanding for the period less the weighted average unvested common shares subject to forfeiture and dilutive common stock equivalents for the period determined using the treasury-stock method. For purposes of this calculation, in-the-money options and warrants to purchase common stock and convertible preferred stock are considered to be common stock equivalents but are not included in the calculation of diluted net loss per share for the six month periods ended June 30, 2013 and 2012 as their effect is anti-dilutive. For the six month period ended June 30, 2013 and 2012 there were no in-the-money common stock equivalents.

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net loss attributable to controlling interest	$	(2,554,204	)	$	(1,472,521	)	$	(5,076,789	)	$	(3,456,397	)

Basic and diluted net loss per common share attributable to controlling interest:
Weighted-average shares used in computing basic and diluted net loss per common share		25,000,961			10,159,163			23,990,576			8,482,078

Basic and diluted net loss per common share attributable to controlling interest	$	(0.10	)	$	(0.14	)	$	(0.21	)	$	(0.41	)

3. Investments

MRI Interventions, Inc.

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

During the six month period ended June 30, 2013, the Company sold its remaining investment in MRI and recognized a gain of $71,712 on the sale of these shares. There were no sales of MRI shares and no gain or loss recognized during the six month period ended June 30, 2012.

As of December 31, 2012, the fair value of the Company’s investment in MRI was $96,346. Unrealized holding gains, net of tax, on available-for-sale securities were $45,469 as of December 31, 2012.

4. Merger

On January 17, 2012, the Company merged with Oncogenerix, Inc., a specialty pharmaceutical company focused on the identification, development and commercialization of branded and generic oncology and oncology support pharmaceutical products, as a result of which Oncogenerix became a wholly-owned subsidiary of DARA. The Directors of DARA believed the acquisition of Oncogenerix and the rights to Soltamox leveraged DARA's existing cancer drug development program and provided DARA with the possibility of generating near term revenue, as well as establishing a commercial platform whereby other cancer and cancer-support products may be accessed in the future through pending Oncogenerix licensing efforts. Going forward, cancer-support products and other product licensing opportunities, will be the basis of the Company's long-term product portfolio.

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The merger was accounted for under the acquisition method of accounting for business combinations in accordance with FASB ASC 805, Business Combinations, which requires, among other things that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The results of operations of Oncogenerix were consolidated beginning on the date of the merger. Acquisition-related costs are not included as a component of the acquisition accounting, but are recognized as expenses in the periods in which the costs are incurred. Any changes within the measurement period resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recorded at the acquisition date.

DARA agreed to acquire Oncogenerix for consideration consisting of 1,114,559 shares of restricted stock issued at closing with a value of $1,727,568 determined based on the closing price of the stock at closing on January 17, 2012 and up to 1,114,559 in additional shares of stock to be issued in the future if certain contingent milestones are achieved (“contingent merger consideration shares”) with a discounted value of $1,036,541 determined as of the closing date based upon a probability-weighted assessment of the occurrence of triggering events outlined in the merger agreement. The fair value of the contingent shares issuable is recorded in additional-paid in capital.

Of the 1,114,559 restricted shares of common stock (equal to 19.9 percent of DARA’s common stock outstanding) issued to the Oncogenerix stockholders as of the closing date of January 17, 2012, 167,184 of these shares were deposited into an escrow account and held for offset against possible indemnification claims against the sellers. Up to an additional 1,114,559 shares could be issued over a period of up to 60 months following the closing date (“contingent merger consideration shares”). The issuance of the contingent merger consideration shares is based on the achievement of certain financial milestones related to sales or market capitalization or upon a change of control during the contingent earn out period. On May 15, 2012 the Company’s Board of Directors determined the Company had achieved one of the specified milestones and 222,912 of these shares were issued.

On January 17, 2012, the Company estimated the fair value of the upfront consideration based upon the closing price of the stock on the date of the merger for the upfront shares and determined a value of $1,727,568 and estimated the fair value of the contingent consideration shares using a probability-weighted assessment of the occurrence of the triggering events related to those shares and determined a value of $1,560,384 resulting in a total fair value for all consideration of $3,287,952.

As of December 31, 2012, the Company revised the probability-weighted assessment of the contingent consideration shares based upon a better understanding of the future outlook for certain products acquired and reduced the value of those shares to $1,036,541 for a total revised fair value of $2,764,109. In accordance with the provisions of FASB ASC 805, the following table presents the preliminary allocation of the total fair value of consideration transferred, as discussed above, to the acquired tangible and intangible assets and assumed liabilities of Oncogenerix based on their estimated fair values as of the closing date of the transaction, measurement period adjustments recorded since that date and the adjusted allocation of the total fair value:

	January 17, 2012 (As initially reported)			Measurement Period Adjustments (1)			January 17, 2012 (As adjusted)

Cash	$	10,632		$	-		$	10,632
Other assets		550			-			550
Soltamox license		3,367,201			(73,801	)		3,293,400
Accounts payable and accrued liabilities		(90,431	)		-			(90,431	)
Deferred tax liability related to intangibles
acquired		-			(1,271,252	)		(1,271,252	)
Total identifiable net assets		3,287,952			(1,345,053	)		1,942,899
Goodwill		-			821,210			821,210
Total fair value of consideration	$	3,287,952		$	(523,843	)		2,764,109

(1)

The measurement period adjustments were recorded in the fourth quarter of 2012 and primarily reflect changes in the fair value of the consideration transferred and the recording of a deferred tax liability and resulting goodwill. The measurement period adjustments were made to reflect facts and circumstances existing as of the merger date and did not result from intervening events subsequent to the merger date.

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Subsequent to the final allocation, the Company reduced its valuation allowance for the amount of the deferred tax liability resulting in a tax benefit of $1,271,253 for the period ended December 31, 2012. The Company is amortizing the Soltamox license over the estimated useful life of seventy-eight months on a straight line basis, beginning with January 2012.

Pro Forma Impact of the Oncogenerix Merger

The results of operations of Oncogenerix are included in the Company’s consolidated financial statements from the closing date of January 17, 2012. There is no difference between the results presented and the results that would have been presented had the results of operations of Oncogenerix been included in the Company’s consolidated financial statements from January 1, 2012.

5. Gelclair License

On September 12, 2012, the Company acquired an exclusive license with Helsinn, to distribute, promote, market and sell Gelclair, a unique oral gel whose key ingredients are polyvinylpyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid) for treatment of certain approved indications in the United States and the right to subcontract certain of those licensed rights to subcontractors. Gelclair is an FDA-cleared product indicated for the treatment of oral mucositis. The Company has determined there is a strong likelihood that certain milestones under its license agreements will be reached and that the additional consideration will be paid when due. This liability has been recorded in the Company’s financial statements at the initial discounted value of approximately $703,000. The discounted value of the additional consideration has been recorded by the Company as a non-current asset with a portion recorded as a current liability and the balance recorded as a long-term liability on its December 31, 2012 balance sheet. The liability was discounted at the Company's estimated long-term borrowing rate. During the six months ended June 30, 2013, the Company recorded an additional current liability of $125,000 related to certain sales milestones due under its license agreement. The Company is amortizing these prepaid license fees over the estimated useful life of one hundred twenty months on a straight line basis, beginning with September, 2012.

6. Stockholders’ Equity

On December 28, 2012, the Company entered into a securities purchase agreement with an institutional investor providing for the issuance and sale by the Company of $2,800,000 of shares of Series B-3 and Series B-4 convertible preferred stock (convertible into a combined total of 3,684,210 shares of common stock). In connection with the purchase of shares of Series B-3 and B-4 convertible preferred stock, the investor received warrants to purchase a number of shares of common stock equal to the number of shares of common stock into which such investor’s shares of Series B-3 and B-4 convertible preferred stock are convertible, at an exercise price equal to $1.05. Each warrant is exercisable at any time on or after the six-month anniversary of date of issuance (the “Initial Exercise Date”). One-half of the warrants are exercisable for two years from the Initial Exercise Date, but not thereafter, and the other half are exercisable for five years from the Initial Exercise Date, but not thereafter.

Because the net proceeds of the offering of $2,515,729 were not received until January 2013, the transaction was accounted for in the quarter ended March 31, 2013. Pursuant to the Amendment to Series B-2 Securities Purchase Agreement and Warrants described below, the requisite 67% of the then outstanding Series B-2 holders agreed to amend the Series B-2 purchase agreement to remove certain approval rights over subsequent Company financings previously accorded the Series B-2 holders.

The Series B-3 convertible preferred stock was issued pursuant to an effective shelf registration statement. The Series B-4 convertible preferred stock and the warrants were issued without registration. Accordingly, the investor may exercise those warrants and sell the underlying shares only pursuant to an effective registration statement under the Securities Act covering the resale of those shares, an exemption under Rule 144 under the Securities Act or another applicable exemption under the Securities Act. The Company filed a registration statement with the SEC covering the resale of the shares of common stock issuable upon conversion of or in connection with the Series B-4 convertible preferred stock and upon exercise of the warrants, which registration was declared effective on April 10, 2013.

In connection with the Series B-3 and B-4 transaction, on December 28, 2012, the Company entered into an Amendment to Series B-2 Securities Purchase Agreement and Warrants with all of the current holders of warrants issued by the Company pursuant to the securities purchase agreement, dated April 6, 2012. Pursuant to the amendment, the warrant holders agreed to amend the April Purchase Agreement to permit the Company to conduct financings below $1.00 and the Company agreed to amend the exercise price of the warrants issued to such warrant holders. In connection with the amendment, the exercise price of a total of 5,125,000 of $1.25 warrants was reduced to $1.00 and the exercise price of a total of 3,954,800 of $1.00 warrants was reduced to $0.80. Additionally, pursuant to the certificate of designations for Series B-2 preferred stock, the conversion price of the Company’s then outstanding shares of Series B-2 convertible preferred stock was adjusted from $1.00 to $0.76. The fair value of the warrant modifications was determined to be $238,593 and was recorded as an expense to general and administrative expense as of December 31, 2012.

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On April 6, 2012, the Company entered into a securities purchase agreement with certain investors in connection with a registered public offering by the Company of 10,250 shares of the Company's Series B-2 convertible preferred stock (which were initially convertible into a total of 10,250,000 shares of common stock) and warrants to purchase up to 5,125,000 shares of the Company's common stock at an exercise price of $1.00 per share and warrants to purchase up to 5,125,000 shares of the Company's common stock at an exercise price of $1.25 per share (adjusted to $0.80 and $1.00 respectively, pursuant to the amendment described above) for gross proceeds of $10,250,000. The closing of the sale of these securities took place on April 12, 2012 for net proceeds of $9,183,468.

Shares of Series B-2 preferred stock have a liquidation preference equal to $1,000 per share and, subject to certain ownership limitations, are convertible at any time at the option of the holder into shares of the Company's common stock at an initial conversion price of $1.00 per share (adjusted to $0.76). The Series B-2 warrants represent the right to acquire shares of common stock at an exercise price of $1.00 per share and $1.25 per share and will expire on April 12, 2017.

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

Management determined that there were no beneficial conversion features for the Series B-2 convertible preferred stock because the effective conversion price was equal to or higher than the fair value at the date of issuance. As a result of the merger with Oncogenerix on January 17, 2012, 1,114,560 shares of DARA common stock were issued to former Oncogenerix stockholders. In addition to the initial shares the Oncogenerix stockholders will be entitled to receive up to an additional 1,114,560 shares of DARA common stock based upon the combined company's achievement of certain revenue or market capitalization milestones during the 60 months following the Closing Date. On May 15, 2012, 222,912 of these contingent shares were issued.

On January 17, 2012, the Company entered into a Securities Purchase Agreement with an institutional investor in connection with a registered direct offering by the Company of 1,700 shares of the Company's Series B-1 convertible preferred stock (which were convertible into a total of 1,238,616 shares of common stock) and warrants to purchase 619,308 shares of the Company's common stock, for gross proceeds of $1.7 million. The warrants represent the right to acquire shares of common stock at an exercise price of $1.31 per share and will expire on January 20, 2017. The closing of the sale of these securities took place on January 20, 2012 for net proceeds of $1.5 million.

During the six month period ended June 30, 2013, investors in the B-2 preferred stock exercised 1,213,874 warrants at $.80 per share for proceeds of $971,099 and 250,000 warrants at $1.00 per share for proceeds of $250,000. In addition, during the same period, investors in the B-2 preferred stock have converted 1,060 shares into 1,394,735 shares of common stock and investors in the B-3 preferred stock have converted all 2,550 shares into 3,355,258 shares of common stock. During the six months periods ended June 30, 2012, 1,350 Series B-1 preferred shares were converted into 983,610 shares of common stock.

7. Share-based Compensation

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

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The fair value of options granted to employees and non-employee directors for the three and six months ended June 30, 2013 was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:

	Three months ended June 30, 2013			Six months ended June 30, 2013
Expected dividend yield		-	%		-	%
Expected volatility		108	%		117	%
Weighted-average expected life (in years)		5.7			5.9
Risk free interest rate		0.97	%		0.99	%
Forfeiture rate		10	%		10	%

The Company’s consolidated statements of operations for the three and six month periods ended June 30, 2013 and 2012, respectively, include the following share-based compensation expense related to issuances of stock options to employees and non-employee directors as well as warrants to non-employees as follows:

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Research and development	$	11,383	$	11,475	$	48,107	$	13,179
Sales and marketing		30,688		55,178		81,028		69,400
General and administration		109,019		102,281		330,455		133,822
Total stock-based compensation to employees
and non-employee directors	$	151,090	$	168,934	$	459,590	$	216,401

Warrants to non-employees
Other income, net	$	18,224	$	-	$	18,224	$	-
General and administrative		57,550		44,526		95,917		74,210
Total stock-based compensation to		75,774		44,526		114,141		74,210
non-employees

Total stock-based compensation	$	226,864	$	213,460	$	573,731	$	290,611

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 $75,774 and $114,141 share-based compensation related to the issuance of 150,000 warrants in the first quarter of 2013 at an exercise price of $1.02 to non-employees (i.e. consultants) and the issuance of 36,231 warrants in the second quarter of 2013 at an exercise price of $0.69 to non-employees in exchange for services during the three and six month periods ended June 30, 2013. The Company recognized $44,526 and $74,210 share-based compensation related to the issuance of 150,000 warrants at an exercise price $1.50 to non-employees (i.e. consultants) in exchange for services during the three and six month periods ended June 30, 2012, respectively.

Unrecognized share-based compensation expense, including time-based options and, performance-based options expected to be recognized over an estimated weighted-average amortization period of 3.0 years was $1.3 million at June 30, 2013 and over an estimated weighted-average amortization period of 3.3 years was $375,254 at June 30, 2012.

In September 2012, the Company issued 400,000 shares of restricted stock to non-employees (i.e. consultants) in exchange for services pursuant to a consulting agreement with a vendor (“the Consulting Agreement”). The Company terminated this Consulting Agreement on January 29, 2013 and pursuant to the terms of the agreement, 200,000 of the original 400,000 shares were returned to the Company and cancelled. In January 2013, the Company issued 40,000 additional restricted shares to these non-employees for services provided in 2012. Although the shares were not issued until 2013, the compensation was recognized in 2012. As of December 31, 2012, there was unrecognized compensation cost related to the 200,000 nonvested restricted shares which were subsequently forfeited.

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A summary of activity under the Company’s stock option plans for the three and six months ended June 30, 2013 is as follows:

	Available			Outstanding			Exercise
	for Grant			Options			Price
Balance at December 31, 2012		459,033			1,331,887		$	1.63
2008 Stock Plan increase		4,261,907			-			-
Options granted		(1,752,512	)		1,752,512			1.00
Options forfeited		37,500			(37,500	)		(1.00	)
Balance at March 31, 2013		3,005,928			3,046,899		$	1.28
Options granted		(500,000	)		500,000			0.78
Options forfeited		51,064			(51,064	)		(1.16	)
Balance at June 30, 2013		2,556,992			3,495,835		$	1.21

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. On November, 2012, a suit was filed in the United States District Court District of Columbia naming the Company as a defendant. Plaintiff in the suit is GlycoBioSciences, Inc. Also named as defendant is Innocutis Holdings, LLC (“Innocutis”), Plaintiff alleges that defendants’ distribution and sale of Bionect infringes on certain of plaintiff’s patents and plaintiff seeks to enjoin defendants’ alleged patent infringement and seeks unspecified damages and costs. Pursuant to the Company’s license agreement with Innocutis, Innocutis is required to indemnify the Company in connection with this lawsuit. As a result, Innocutis has assumed the Company’s defense. The defendants filed a motion to dismiss the complaint on February 1, 2013. The litigation is currently stayed pending conclusion of reexamination proceedings in the US Patent and Trademark Office involving the two patents asserted by plaintiff. The Company believes the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, the Company believes that the resolution of this matter will not have a material adverse effect on these financial statements.

9. Income Taxes

As of June 30, 2013, the Company has losses from continuing operations and other comprehensive income related to its available for sale securities. The Company has allocated income tax expense or benefit to continuing operations and other comprehensive income based on the provision of FASB ASC 740. Accordingly, the Company has recognized income tax expense in continuing operations of $28,584 for the six month period ended June 30, 2013. The income tax expense is offset by an income tax benefit recognized in other comprehensive income.

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

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10. License Agreement

On June 17, 2013, the Company entered into a license agreement with T3D Therapeutics Inc., granting them worldwide rights to develop and commercialize DB959. DB959 is an oral, highly selective, dual PPAR nuclear receptor agonist. Under the terms of the agreement, the Company is eligible to receive certain license fees, milestone payments and royalty payments. Pursuant to the Company’s agreement with T3D, it received $250,000 in connection with the execution of the agreement and is to be paid another $250,000 no later than December 20, 2013. The Company has recognized the income from the first payment in other income, net in the consolidated statements of operations for the three and six month periods ended June 30, 2013 and expects to recognize the second payment once received or when collectability is reasonably assured.

In connection with its T3D license agreement, the Company also entered into an amendment with Bayer Healthcare LLC (“Bayer”), related to its license agreement dated October 7, 2007. Under the terms of the original Bayer contract, the Company was obligated to pay an annual minimum fee of $250,000 to Bayer. The agreement also calls for milestone payments to Bayer upon the achievement of certain development milestones as well as royalties upon commercial launch. The amendment approved the Company’s license agreement with T3D and reduced minimum annual payments under the original agreement with Bayer for the years 2012 and 2013 from $250,000 to $125,000. The 2012 annual fee of $250,000 was previously recognized in research and development expense for the year ended December 31, 2012. Due to the reduction in the payment, the Company reduced research and development expense for the three and six month periods ended June 30, 2013 by $125,000. The 2013 Bayer minimum payment of $125,000 has been recorded as a reduction in other income, net for the three and six month periods ended June 30, 2013. At June 30, 2013, the Company has $250,000 recorded in accounts payable for the minimum annual amounts owed to Bayer through 2013. Beginning in 2014 and going forward, the Company’s minimum annual commitment to Bayer will equal $250,000, the same amount as the annual commitment to be received from T3D, unless the agreement is terminated. The development milestone payments and royalties owed to Bayer upon commercialization are equal to the amounts that the Company would receive from T3D. The T3D license agreement also provides for additional milestone payments from T3D related to achievement of certain Phase 2 and Phase 3 clinical development milestones by T3D that are above the amounts due to Bayer.

Under the terms of the T3D agreement, either party can terminate for breach by the other party with 30 days prior written notice following a 90 day cure period. T3D will have the right to terminate after one year from the effective date of the agreement with 90 days prior written notice.

Under the terms of the Bayer agreement, either party has the right to terminate for breach by the other party. DARA has the right to terminate at any time with 30 days prior written notice.

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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, 2012, which has been filed with the Securities and Exchange Commission (the “SEC”).

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Form 10-Q, the words “believe,” “anticipates,” “intends,” “plans,” “estimates,” and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to factors that could cause actual results to differ materially for us from those projected. Those factors include risks and uncertainties relating to our current cash position and our need to raise additional capital in order to be able to continue to fund our operations, the potential delisting of our common stock from the NASDAQ Capital Market, the potential stockholder dilution that may result from future capital raising efforts, full ratchet anti-dilution protection afforded investors in prior financing transactions that may restrict or prohibit our ability to raise additional capital on terms favorable to the Company and its current stockholders, our limited operating history which may make it difficult to evaluate our business and future viability, our ability to retain our managerial personnel and to attract additional personnel, our ability to timely commercialize and generate revenues or profits from our commercial products, any revenue we generate will come from a small group of commercialized products, our ability to successfully partner our clinical stage assets as intended, the current regulatory environment in which we develop and sell our products, the market acceptance of those products, dependence on partners and third-party manufacturers, successful performance under collaborative and other commercial agreements, potential product liability risks that could exceed our liability coverage, potential risks related to healthcare fraud and abuse laws, competition from other pharmaceutical companies, biotechnology companies and other research and academic institutions, the strength of our intellectual property, the intellectual property of others and other risk factors identified in the documents we have filed, or will file, with the SEC. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as result of various factors, including, among others, the potential risks and uncertainties described in the Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of our Annual Report on Form 10-K for the year ended December 31, 2012 and in any subsequently filed Quarterly Reports on Form 10-Q. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC. Except as required by law, we undertake no obligation to update any forward-looking statements.

Overview

We are a North Carolina-based specialty pharmaceutical company primarily focused on the commercialization of oncology treatment and oncology supportive care pharmaceutical products. Through our acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, we acquired exclusive U.S. marketing rights to our first commercial proprietary product, SoltamoxÒ (oral liquid tamoxifen). SoltamoxÒ has been approved by the U.S. Food and Drug Administration (“FDA”) for the prevention and treatment of breast cancer. On September 7, 2012, we entered into a license agreement with Helsinn Healthcare SA (“Helsinn”) to distribute, promote, market and sell Gelclair®, a unique oral gel whose key ingredients are polyvinlypyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid), for the treatment of certain approved indications in the United States. Gelclair is an FDA-cleared product indicated for the treatment of oral mucositis. In addition, we have a marketing agreement with Innocutis Holdings, LLC pursuant to which we promote BionectÒ (hyaluronic acid sodium salt, 0.2%) within the U.S. oncology and radiation oncology marketplace. Bionect has been cleared by the FDA for the management of irritation of the skin as well as first and second degree burns.

We have a clinical development asset, KRN5500, which is a phase 2 product candidate targeted for treating cancer patients with painful treatment-refractory chronic chemotherapy induced peripheral neuropathy (CCIPN). KRN5500 has been designated a Fast Track Drug by the FDA. We are looking to partner the drug with an established oncology development company to undertake and support further development costs.

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As part of our strategic plan to focus on the commercialization of oncology treatment and oncology supportive care products, on June 17, 2013, we granted T3D Therapeutics, Inc. (T3D) the exclusive worldwide rights to develop and commercialize DB959, an oral, highly selective, dual PPAR nuclear receptor agonist, which we had previously developed through Phase I clinical trials for the treatment of diabetes and dyslipidemia. Pursuant to our agreement with T3D, we received $250,000 in connection with the execution of the agreement and are to be paid another $250,000 no later than December 20, 2013. We intend to use these license fees to eliminate $500,000 in existing liabilities associated with DB959. The Company is also entitled to receive certain milestone payments upon achievement of certain development milestones by T3D.

In our sales and marketing efforts we are employing a multi-disciplinary approach to reach and educate health care providers, dispensers, patient advocacy groups, foundations, caregivers and patients directly. We believe we can accomplish this through utilization of our own specialized sales organization, innovative marketing programs, partnerships with specialty pharmacy providers, working with patient advocacy groups and foundations as well as collaborative arrangements with third party sales organizations. As we gain additional commercial experience with our current products, we may expand our sales force activities.

In order to successfully achieve these goals, having sufficient liquidity is very important since we have generated minimal revenues from operations to date. We have previously 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. We expect to continue to incur operating losses in the near-term. Our results may vary depending on many factors, including the success of our building a successful sales and marketing organization, our ability to properly anticipate customer needs and the progress of licensing activities of KRN5500 with pharmaceutical partners. We continue to pursue other in-licensing opportunities for approved products.

Product Commercialization

Our primary focus is on the commercialization of the following types of oncology treatment and oncology supportive care pharmaceutical products:

●	Soltamox, an FDA-approved oral solution of tamoxifen citrate and other liquid formulation products; and

●	Cancer support therapeutics, including Gelclair, an FDA-cleared product indicated for the treatment of oral mucositis and Bionect, an FDA cleared product for the management of irritation of the skin as well as first and second degree burns

Oral liquid formulations of FDA approved products

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

Soltamox

Soltamox (tamoxifen citrate) oral solution, our first proprietary, FDA approved product, is a drug primarily used to treat breast cancer. Soltamox is the only liquid formulation of tamoxifen available for sale in the United States. As a result of our acquisition of Oncogenerix, we became party to an exclusive license and distribution agreement with Rosemont Pharmaceuticals, Ltd., a U.K. based manufacturer, for rights to market Soltamox in the United States. Previously, Soltamox was marketed only in the U.K. and Ireland by Rosemont Pharmaceuticals, Ltd. Soltamox is protected by a U.S. issued patent which expires in June 2018. Under the License Agreement, the Company is obligated to meet minimum sales thresholds during the License Agreement’s seven-year term. We launched Soltamox in the U.S. in the fourth quarter of 2012.

Soltamox is used primarily for the chronic treatment of breast cancer or for cancer prevention in certain susceptible breast cancer subgroups. The National Cancer Institute (NCI) estimated in 2012 that 229,060 women would be diagnosed with breast cancer and 39,920 women would die as a result of the disease. Tamoxifen therapy is generally indicated for breast cancer patients for up to 5 years.

In order to commercialize Soltamox, we have established a specialty commercial sales force which markets Soltamox to oncologists. Current physicians who prescribe tablet forms of tamoxifen in the United States are well known and easily identified by data sources such as IMS and Wolters Kluwer, providers of information services for the healthcare industry.

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We are employing a multi-disciplinary approach to reach and educate health care providers, dispensers, patient advocacy groups, foundations, caregivers and patients directly. We believe we can accomplish this through utilization of a combination of our own specialized sales organization and independent sales representatives, tele-detailing, appropriate levels of product sampling, innovative marketing programs, partnerships with Specialty Pharmacy Providers, working with Patient Advocacy Groups and Foundations as well as collaborative arrangements with third party sales organizations. We have also initiated a registry survey called CAPTURE to gather information on compliance, adherence and preference for a liquid therapy among current tamoxifen patients.

Cancer support therapeutics

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

Gelclair

On September 7, 2012, we entered into a distribution and license agreement with Helsinn Healthcare SA. The Company was granted an exclusive license to distribute, promote, market and sell Gelclair for treatment of certain approved indications in the United States. Gelclair, a unique oral gel whose key ingredients are polyvinlypyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid), is an FDA-cleared product indicated for the treatment of oral mucositis. Gelclair is protected by a U.S. issued patent which expires in 2021. Under the License Agreement, the Company is obligated to meet minimum sales thresholds during the License Agreement’s ten-year term. The License Agreement also provides that the Company will receive exclusive rights to distribute, promote, market and sell Gelclair for an additional indication if Helsinn is able to obtain regulatory approval for such indication. We launched Gelclair in the U.S. in April, 2013.

Bionect

On March 23, 2012, we entered into an Exclusive Marketing Agreement with Innocutis Holdings, LLC pursuant to which we promote Bionect (hyaluronic acid sodium salt, 0.2%) within the U.S. oncology and radiation oncology marketplace. Bionect has been approved by the FDA for the management of irritation of the skin as well as first and second degree burns. Previously, Bionect was promoted and sold by Innocutis only in the dermatology market. Bionect is currently being promoted and sold by Innocutis in the dermatology market. Bionect is protected by a U.S. issued patent that expires in 2016. The Company will be compensated by Innocutis for each unit sold in the U.S. oncology and radiation oncology market. The Company began promoting Bionect in the U.S. oncology and radiation oncology market in the second quarter of 2012.

Clinical Stage Assets

While we have two clinical stage assets, we do not intend to further develop either asset on our own. Our clinical stage assets are as follows:

●	KRN5500, a phase 2a drug targeted for treating painful treatment-refractory chronic chemotherapy induced peripheral neuropathy in cancer patients; and

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

KRN5500

KRN5500 is a novel, non-narcotic/non-opioid intravenous product for the treatment of painful chronic chemotherapy induced peripheral neuropathy in patients with cancer. The drug has successfully completed a Phase 2a proof of concept study in patients with advanced cancer and analgesia-resistant neuropathic pain where it showed statistically-significant pain reduction versus placebo (p = 0.03) using standardized pain test scores. There were no major safety concerns although nausea and vomiting were a common occurrence. The FDA has designated KRN5500 a Fast Track drug, based on its potential usefulness in treating a serious medical condition and in fulfilling an unmet medical need. We have improved and simplified the formulation and manufactured new drug substance for the next clinical trial. We are working with the National Cancer Institute (NCI) to design an additional clinical trial under joint DARA-NCI auspices. Since KRN5500 would complement our portfolio of oncology treatment and supportive care pharmaceuticals, we are looking to partner the drug with an established oncology development company to undertake and support the cost for the Phase 2b program.

On November 8, 2012 we submitted a request seeking Orphan designation for KRN5500 to the Office of Orphan Products Development at the FDA. The orphan indication we are seeking is in cancer patients with painful treatment-refractory chronic chemotherapy induced peripheral neuropathy (CCIPN). We are in communication with the FDA regarding this orphan application and have recently on August 8, 2013 provided them with additional information as requested.

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DB959

DB959 comes from a family of PPAR alpha/delta/gamma agonists licensed from Bayer Pharmaceuticals Corporation. DB959 is an oral, highly selective, dual PPAR nuclear receptor agonist. The drug activates genes involved in the metabolism of sugars and fats, thereby improving the body’s ability to regulate both aspects of diabetes. DB959 has successfully completed Phase 1 trials, in which it demonstrated a good safety profile even when dosed at approximately 10 times the anticipated human dose. DB959 is outside the scope of our therapeutic focus. Accordingly, as part of our strategic plan to focus on the commercialization of oncology supportive care products, during the second quarter of 2013, we granted T3D Therapeutics, Inc. the exclusive worldwide rights to develop and commercialize DB959.

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 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.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this report, we believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results.

Revenue Recognition

We recognize sales revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonably assured and the price is fixed or determinable We sell mostly to wholesalers who, in-turn, sell the product to hospitals and other end-user customers. Sales to wholesalers provide for selling prices that are fixed on the date of sale, although we offer certain discounts to group purchasing organizations and governmental programs. The wholesalers take title to the product, bear the risk of loss of ownership, and have economic substance to the inventory.

We allow for product to be returned beginning prior to and following product expiration. We do not believe that we have sufficient sales and returns history at this time to reasonably estimate product returns from our wholesaler distribution channel. Therefore, we are deferring the recognition of revenue until the wholesalers sells their product to hospitals or other end-user customers. We will continue to defer revenue recognition until the point at which we have obtained sufficient sales history to reasonably estimate returns from the wholesalers and inventory levels are reduced to normalized amounts. Shipments of product that are not recognized as revenue are treated as deferred revenue until evidence exists to confirm that pull through sales to hospitals or other end-user customers have occurred. Revenue is recognized from product sales directly to hospitals, clinics, and pharmacies when the merchandised is shipped.

We recognize sales allowances as a reduction of revenues in the same period the related revenue is recognized. Sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with wholesale distributors and the levels of inventory within the distribution channels that may result in future discounts taken. We must make significant judgments in determining these allowances. If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future, which could have an effect on revenue in the period of adjustment. The following briefly describes the nature of each provision and how such provisions are estimated

●	Payment discounts are reductions to invoiced amounts offered to customers for payment within a specified period and are estimated upon shipment utilizing historical customer payment experience.

●

The returns reserve is based on management's best estimate of the product sales recognized as revenue during the period that are anticipated to be returned. The returns reserve is recorded as a reduction of revenue in the same period the related product sales revenue is recognized and is included in accrued expenses.

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Income Taxes

The Company uses the liability method in accounting for income taxes as required by FASB ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry forwards and for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. At June 30, 2013 and 2012 a valuation allowance has been recorded to reduce the net deferred tax asset to zero.

The Company's policy for recording interest and penalties is to record them as a component of interest income (expense), net.

Sales and Marketing Costs

Sales and marketing costs consist of salaries, commissions, and benefits to sales and marketing personnel, sales personnel travel and operating costs marketing programs, certain promotional allowances to customers, co-pay assistance and administration costs and advertising costs.

Research and Development Expenses

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

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 make 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.

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 (“ASC 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 our 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. Please refer to Note 7 - Share Based Compensation, included in the condensed consolidated financial statements appearing elsewhere in this report, for additional information regarding our adoption of ASC 718.

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Significant Judgments and Estimates

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, 2013 Compared to Three Months Ended June 30, 2012

Net revenues and cost of product sales increased to $76,936 and $8,754 for the three months ended June 30, 2013, respectively over the comparable prior year quarter due to the launch of Soltamox in the fourth quarter of 2012 and the launch of Gelclair in the second quarter of 2013. There were no revenues recognized in the second quarter of 2012.

Sales and marketing costs consist of salaries and benefits to sales and marketing personnel, marketing programs, and distribution establishment costs. Sales and marketing expense increased by $554,570 from $333,026 for the three months ended June 30, 2012 to $887,596 for the corresponding 2013 period as a result of the Company’s merger with Oncogenerix and the costs incurred in establishment of a sales and marketing infrastructure to support the promotion of Bionect, Soltamox and Gelclair. In the 2012 period, we were in the process of building the necessary commercial infrastructure.

Research and development expenses decreased by $37,310 from $546,215 for the three months ended June 30, 2012 to $508,905 for the corresponding 2013 period, as a result of the $125,000 credit of expense associated with the Bayer license amendment which reduced the 2012 minimum payment from $250,000 to $125,000, offset by consulting expenses associated with Soltamox and clinical Active Pharmaceutical Ingredient “API” manufacturing costs associated with the KRN5500 program in order to better position the program for partnering discussions.

General and administrative expenses consist primarily of salaries and benefits, professional fees related to administrative, finance, human resource, legal and information technology functions. In addition, general and administrative expenses include facility, basic operational and support costs and insurance costs. General and administrative expenses increased by $404,637 from $847,100 for the three months ended June 30, 2012 to $1,251,737 for the corresponding 2013 period, primarily as a result of increased personnel costs partially offset by decreased SEC expenses.

Depreciation and amortization expense decreased by $16,308 from $172,464 for the three months ended June 30, 2012 to $156,156 for the corresponding 2013 period, primarily as a result of lower amortization expense.

Other income, 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 changed by $62,840 from $3,057 of income for the three months ended June 30, 2012 to $65,897 of income for the corresponding 2013 period, primarily as a result of $250,000 license revenue recognized during the second quarter of 2013 related to the sublicense of DB959 to T3D Therapeutics, Inc., partially offset by the 2013 $125,000 annual payment to Bayer, certain costs incurred in connection with the transaction and by accretion of interest expense associated with discounted Helsinn milestone liabilities.

Consolidated net loss increased by $1,097,282 from $1,573,033 for the three months ended June 30, 2012 to $2,670,315 for the corresponding 2013 period, primarily due to the factors discussed above.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net revenues and cost of products sold increased to $98,116 and $26,261 for the six months ended June 30, 2013, respectively over the comparable prior year quarter due to the launch of Soltamox in the fourth quarter of 2012 and the launch of Gelclair in the second quarter of 2013. There were no revenues recognized in the first half of 2012.

Sales and marketing expense increased by $1,176,859 from $408,292 for the six months ended June 30, 2012 to $1,585,151 for the corresponding 2013 period as a result of our merger with Oncogenerix and the costs incurred in establishment of a sales and marketing infrastructure to support the promotion of Bionect, Soltamox and Gelclair. In the 2012 period, we were in the process of building the necessary commercial infrastructure.

Research and development expenses increased by $331,350 from $862,051 for the six months ended June 30, 2012 to $1,193,401 for the corresponding 2013 period, as a result of consulting expenses associated with Soltamox and API manufacturing costs associated with the KRN5500 program in order to better position the program for partnering discussions, partially offset by the $125,000 credit of expense associated with the Bayer license amendment which reduced the 2012 minimum payment from $250,000 to $125,000.

General and administrative expenses increased by $110,926 from $2,334,086 for the six months ended June 30, 2012 to $2,445,012 for the corresponding 2013 period, primarily as a result of increased personnel costs, partially offset by the absence of merger costs related to the Oncogenerix merger that occurred during the 2012 first quarter and reduced audit and tax expenses.

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Depreciation and amortization expense decreased by $29,769 from $341,692 for the six months ended June 30, 2012 to $311,923 for the corresponding 2013 period, primarily as a result of lower amortization expense.

Other income (expense) changed by $155,098 from $3,047 of income for the six months ended June 30, 2012 to $158,145 of income for the corresponding 2013 period, primarily as a result of the $250,000 license revenue recognized during the second quarter of 2013 related to the sublicense of DB959 to T3D Therapeutics, Inc. and the gain on sale of the remainder of our marketable securities of $71,712, partially offset by the 2013 $125,000 annual payment to Bayer and certain costs incurred in connection with the transaction.

Consolidated net loss increased by $1,713,712 from $3,620,359 for the six months ended June 30, 2012 to $5,334,071 for the corresponding 2013 period, primarily due to the factors discussed above.

Liquidity and Capital Resources

Overview

At June 30, 2013, our principal sources of liquidity were our cash and cash equivalents which totaled $4,940,899. As of June 30, 2013, we had net working capital of $4,214,562. Our cash resources have been used to acquire licenses, and to fund research and development activities, capital expenditures, sales and marketing and general and administrative expenses.

Cash Flows

During the six months ended June 30, 2013, cash used in our operating activities was $5,281,882. Cash used in operating activities was primarily due to the $5,334,071 consolidated net loss and a decrease in accounts payable and accrued liabilities of $891,402, which was partially offset by non-cash stock-based compensation of $573,731 and depreciation and amortization of $311,923. The decrease in accounts payable and accrued liabilities was primarily due to the payment of the 2012 accrual for FDA fees related to Soltamox of $620,000 as well as the payment to Bayer of $250,000 of license fees.

During the six months ended June 30, 2013, cash provided by investing activities was $81,787 primarily related to the $94,005 in net proceeds received from the sale of the Company’s remaining marketable securities.

During the six months ended June 30, 2013, cash provided by financing activities was $3,644,537. We generated $2,515,729 of net cash from the offering of Series B-3 and B-4 convertible preferred stock and warrants and $1,221,099 from the exercise of warrants during the period, which was partially offset by $92,287 of payments on capital leases and other financing agreements.

Financial Condition

We believe we have sufficient working capital to continue our operations through 2013. However, we expect to require additional investment capital to pursue our future business plan. Our capital requirements will depend upon numerous factors, including our ability to generate revenue through our sales and marketing efforts as well the level of costs we incur in building our portfolio of products and expanding our sales and marketing organization and our ability to license our technologies to third parties.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2013.

Nasdaq Listing

On May 13, 2013, we received a notification letter from the Listing Qualifications Department of The NASDAQ Stock Market indicating that, for the last 30 consecutive business days, the bid price for the Company’s common stock has closed below the minimum $1.00 per share requirement for continued listing on The Nasdaq Capital Market under Marketplace Rule 5550(a)(2). In accordance with Marketplace Rule 5550(a)(2), the Company has 180 calendar days, or until November 11, 2013, to regain compliance with the minimum $1.00 price per share requirement. To regain compliance, any time before November 11, 2013, the bid price of the Company’s common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. In the event we do not regain compliance, we may be eligible for additional time. To qualify, we will be required to meet the continued listing requirements for The NASDAQ Capital Market, with the exception of the bid price requirement, and we will need to provide written notice of our intention to cure the deficiency during the second compliance period, by affecting a reverse stock split, if necessary. If we meet these requirements, then we believe we will be granted an additional 180 calendar days. NASDAQ’s notification letter has no effect on the listing of the Company’s common stock at this time.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

During the second quarter of 2013, 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.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On November, 2012, a suit was filed in the United States District Court District of Columbia naming DARA as a defendant. Plaintiff in the suit is GlycoBioSciences, Inc. Also named as defendant is Innocutis Holdings, LLC (“Innocutis”), Plaintiff alleges that defendants’ distribution and sale of Bionect infringes on certain of plaintiff’s patents and plaintiff seeks to enjoin defendants’ alleged patent infringement and seeks unspecified damages and costs. Pursuant to our license agreement with Innocutis, Innocutis is required to indemnify us in connection with this lawsuit. As a result, Innocutis has assumed our defense. The defendants filed a motion to dismiss the complaint on February 1, 2013. The litigation is currently stayed pending conclusion of reexamination proceedings in the US Patent and Trademark Office involving the two patents asserted by plaintiff. We believe the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, we believe that the resolution of this matter will not have a material adverse effect on our financial position or results of operations.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities.

On June 28, 2013, we entered into a warrant agreement with Vector Consulting, LLC (“Vector”) pursuant to which we issued warrants to purchase 36,231 shares of common stock as consideration for consulting services rendered to us by Vector pursuant to the engagement letter dated June 6, 2012. The warrant has a term of five years and an exercise price of $0.69.

The warrant was 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 among other things the following facts:

●	Neither we nor any person acting on our behalf solicited any offer to buy nor sell securities by any form of general solicitation or advertising.

●	At the time of the purchase, the purchaser was an accredited investor, as defined in Rule 501(a) of the Securities Act.

●	The purchaser has had access to information regarding DARA and is knowledgeable about us and our business affairs.

●	All shares issued 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER

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 15, 2013.

	DARA BIOSCIENCES, INC.

Date: August 14, 2013	By:	/s/ David J. Drutz, M.D.
		David J. Drutz, M.D.
		Chief Executive Officer


Date: August 14, 2013	By:	/s/ David L. Tousley
		David L. Tousley
		Chief Financial Officer

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EXHIBIT INDEX

10.1		Exclusive Distribution Agreement dated June 29, 2011 by and between Oncogenerix, Inc. and Rosemont Pharmaceuticals, Limited (Incorporated by reference to Exhibit 10.36 to Pre-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 filed March 13, 2012. Confidential treatment requested for certain portions of this Agreement.)
10.2		Distribution and License Agreement between Helsinn Healthcare SA and DARA BioSciences, Inc., dated September 7, 2012 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012. Confidential Treatment requested for certain portions of this Agreement.)
31.1		Certification of David J. Drutz, M.D. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 14, 2013 *
31.2		Certification of David L. Tousley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 14, 2013 *
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 14, 2013 **
101.INS		XBRL Instance Document***
101.SCH		XBRL Taxonomy Extension Schema***
101.CAL		XBRL Extension Calculation Linkbase***
101.DEF		XBRL Definition Linkbase***
101.LAB		XBRL Taxonomy Extension Label Linkbase***
101.PRE		XBRL Taxonomy Extension Presentation Linkbase***

_______________

* Filed herewith.

**Furnished herewith

***Users of this interactive data file are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of The Securities Act of 1933, is deemed not filed for purposes of Section 18 of The Securities Exchange Act of 1934, and otherwise is not subject of liability under these sections.

Midatech Pharma US Inc. - FORM 10-Q - August 14, 2013

Attached files

Midatech Pharma US Inc. Reports