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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 March 31, 2014
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to
 
Commission file number 000-23776
 
DARA BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
_______________________
 
Delaware   04-3216862
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)
 
8601 Six Forks Road, Suite 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 o Non-accelerated filer  o
Accelerated filer o Smaller reporting company þ
(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 May 12, 2014 was approximately 8,402,030.
 


 
 
 
 
 
Table of Contents
 
PART I - FINANCIAL INFORMATION
       
Item 1.  
 
Financial Statements - Unaudited
3
       
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
       
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
23
       
Item 4.
 
Controls and Procedures
23
 
PART II - OTHER INFORMATION
       
Item 1.
 
Legal Proceedings
24
       
Item 1A.
 
Risk Factors
24
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
24
       
Item 3.
 
Defaults Upon Senior Securities
24
       
Item 4.
 
Mine Safety Disclosures.
24
       
Item 5.
 
Other Information
24
       
Item 6.
 
Exhibits
24
 
 
 
2

 
 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 6,828,110     $ 3,425,543  
Accounts receivable, net
    141,831       174,086  
Inventory, net
    195,142       104,089  
Prepaid expenses and other assets, current portion
    336,953       184,919  
Total current assets
    7,502,036       3,888,637  
                 
Furniture, fixtures and equipment, net
    35,483       40,614  
Restricted cash
    12,883       12,882  
Intangible assets, net
    3,070,792       3,224,711  
Goodwill
    821,210       821,210  
Total assets
  $ 11,442,404     $ 7,988,054  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 983,656     $ 619,566  
Accrued liabilities
    573,163       785,016  
Accrued compensation
    332,566       124,293  
Deferred revenue
    125,715       142,269  
Capital lease obligation, current portion
    4,104       3,917  
Total current liabilities
    2,019,204       1,675,061  
                 
Deferred lease obligation
    78,809       72,729  
License milestone liability, non-current
    678,909       662,215  
Capital lease obligation, net of current portion
    14,945       16,044  
                 
Total liabilities
    2,791,867       2,426,049  
                 
Stockholders’ equity:
               
Preferred stock, $0.01 par value, 1,000,000 shares authorized at March 31, 2014
         
and December 31, 2013.
               
 Series A Preferred stock, 4,800 shares designated,
               
578 shares issued and outstanding at March 31, 2014,
    5       5  
and December 31, 2013.
               
Series B2 Preferred stock, 15,000 shares designated,
               
50 shares issued and outstanding at March 31, 2014,
               
and December 31, 2013.
    1       1  
Series B4 Preferred stock, 250 shares designated,
               
0 shares issued and outstanding at March 31, 2014,
               
100 shares issued and outstanding at December 31, 2013.
          1  
Common stock, $0.01 par value, 75,000,000 shares authorized,
               
8,402,030 shares issued and outstanding at March 31, 2014,
               
6,194,713 shares issued and outstanding at December 31, 2013.
    84,020       61,947  
Additional paid-in capital
    69,305,308       63,540,086  
Accumulated deficit
    (59,650,676 )     (56,992,595 )
                 
Total stockholders’equity before noncontrolling interest
    9,738,658       6,609,445  
Noncontrolling interest
    (1,088,121 )     (1,047,440 )
                 
Total stockholders' equity
    8,650,537       5,562,005  
                 
Total liabilities and stockholders’ equity
  $ 11,442,404     $ 7,988,054  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
 
   
Three months ended March 31,
 
   
2014
   
2013
 
             
Net revenues
  $ 161,486     $ 21,180  
                 
Costs and expenses:
               
   Cost of goods sold
    53,181       17,510  
Sales and marketing
    1,234,578       697,555  
Research and development
    367,607       684,496  
General and administrative
    1,257,356       1,193,275  
Depreciation and amortization of intangibles
    159,050       155,767  
Total costs and expenses
    3,071,772       2,748,603  
Loss from operations
    (2,910,286 )     (2,727,423 )
                 
Other income (expense):
               
Gain on sale of marketable securities and nonmonetary assets
          71,712  
Other income, net
    228,375       38,190  
Interest (expense), net
    (16,851 )     (17,654 )
Other income
    211,524       92,248  
                 
Net loss before income tax expense
    (2,698,762 )     (2,635,175 )
Income tax expense
          (28,584 )
Consolidated net loss
    (2,698,762 )     (2,663,759 )
Loss attributable to noncontrolling interest
    40,681       141,171  
Loss attributable to controlling interest
  $ (2,658,081 )   $ (2,522,588 )
                 
Basic and diluted net loss per common share attributable to controlling interest
  $ (0.37 )   $ (0.55 )
                 
Shares used in computing basic and diluted net loss per common share
    7,204,222       4,593,793  
                 
Comprehensive Loss:
               
Consolidated net loss
  $ (2,698,762 )   $ (2,663,759 )
Other comprehensive income
               
Unrealized loss on investments available for sale
    -       (2,341 )
Reclassification adjustments for gains included in net loss
    -       (71,712 )
Income taxes related to other comprehensive income
    -       28,584  
Other comprehensive income, net of tax
    -       (45,469 )
Comprehensive loss
    (2,698,762 )     (2,709,228 )
Comprehensive loss attributable to noncontrolling interest
    40,681       141,171  
Comprehensive loss attributable to controlling interest
  $ (2,658,081 )   $ (2,568,057 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Three Months ended March 31, 2014
 
                                                               
Stockholders’
             
   
Series A
   
Series B-2
   
Series B-4
                           
Equity
             
   
Convertible
   
Convertible
   
Convertible
               
Additional
         
Before
         
Total
 
   
Preferred Stock
   
Preferred Stock
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Accumulated
   
Noncontrolling
   
Noncontrolling
   
Stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
    Capital     Deficit     Interest     Interest     Equity  
                                                                               
                                                                               
Balance at December 31, 2013
    578     $ 5       50     $ 1       100     $ 1       6,194,713     $ 61,947     $ 63,540,086     $ (56,992,595 )   $ 6,609,445     $ (1,047,440 )   $ 5,562,005  
                                                                                                         
Share-based compensation
                                                -       303,209             303,209             303,209  
Issuance of common stock, net of issuance costs of $506,000
                                        2,166,501       21,665       3,265,037             3,286,702             3,286,702  
Issuance of warrants with common stock
                                                    2,197,383             2,197,383             2,197,383  
Issuance of common stock from exercise of warrants
                                                                             
Conversion of preferred stock to common stock
                            (100 )     (1 )     40,816       408       (407 )                        
Net loss
                                                          (2,658,081 )     (2,658,081 )     (40,681 )     (2,698,762 )
                                                                                                         
Balance at March 31, 2014
    578     $ 5       50     $ 1           $ -       8,402,030     $ 84,020     $ 69,305,308     $ (59,650,676 )   $ 9,738,658     $ (1,088,121 )   $ 8,650,537  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Three months ended March 31,
 
   
2014
   
2013
 
Operating activities
           
Consolidated net loss
  $ (2,698,762 )   $ (2,663,759 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    159,050       155,767  
Deferred income tax expense (benefit)
          28,584  
Accretion of debt discount and other
    16,694       18,185  
Share-based compensation
    303,209       312,729  
Gain on sale of investments
          (71,712 )
Deferred lease obligation
    6,080       13,622  
Changes in operating assets and liabilities, net of effect of business acquisition:
 
Accounts receivable
    32,255       19,189  
Inventory
    (91,053 )     9,460  
Prepaid expenses and other assets
    30,210       33,274  
Accounts payable and accrued liabilities
    181,764       (851,707 )
Net cash used in operating activities
    (2,060,553 )     (2,996,368 )
                 
Investing activities
               
Proceeds from sale of investments
          94,005  
Net cash provided by investing activities
          94,005  
                 
Financing activities
               
Repayments of capital lease obligation
    (912 )     (4,677 )
Repayments on other financing
    (20,052 )     (26,259 )
Proceeds from exercise of options and warrants
          1,221,099  
Net proceeds from issuance of preferred stock and common stock
    5,484,085       2,515,729  
Change in restricted cash
    (1 )     (2 )
Net cash provided by financing activities
    5,463,120       3,705,890  
                 
Net increase in cash and cash equivalents
    3,402,567       803,527  
                 
Cash and cash equivalents at beginning of period
    3,425,543       6,496,457  
Cash and cash equivalents at end of period
  $ 6,828,110     $ 7,299,984  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
6

 
 
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 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 license 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 United States. 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 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.  On February 24, 2014 the FDA granted Orphan Drug Designation to KRN5500 for the parenteral treatment of painful, chronic, chemotherapy-induced peripheral neuropathy that is refractory to conventional analgesics.  Fast Track designation is intended to facilitate the development and expedite review of drugs and biologics intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs.  Orphan drug designation provides extended market exclusivity, tax benefits, and the waiver of certain fees associated with the FDA approval process.  The Company is evaluating options to partner the drug with an established oncology pharmaceutical development company to undertake and support further development costs, as well as determining whether further internal development of KRN5500 could be beneficial to the Company’s partnering efforts.
 
On February 5, 2014, the Company amended its certificate of incorporation in order to effect a one-for-five reverse split of its outstanding common stock. As a result of the reverse stock split, each share of the Company’s common stock outstanding as of 9:00 a.m. on February 10, 2014 was automatically reclassified into one-fifth of a share of common stock. No fractional shares were issued as a result of the reverse split. Holders of common stock who would have otherwise received fractional shares of the Company’s common stock pursuant to the reverse split received cash in lieu of the fractional share. The reverse split reduced the total number of shares of the Company’s common stock outstanding from approximately 31.0 million shares to approximately 6.2 million shares. In addition, the number of shares of common stock subject to outstanding options, restricted stock units and warrants issued by the Company and the number of shares reserved for future issuance under the Company’s stock plans were reduced by a factor of five to proportionately reflect the reverse split. The reverse split was accounted for retroactively and is reflected in our common stock, warrant, stock option and restricted stock activity as of and during the period ended December 31, 2013 and the periods ended March 31, 2014 and 2013.  Unless stated otherwise, all share data in this Quarterly Report on Form 10-Q has been adjusted, as appropriate, to reflect the reverse split.
 
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 developed through Phase 1 clinical trials.  For the license, the Company received a $250,000 up front payment, a second payment of $25,000 in December 2013, a third payment of $100,000 in January 2014 and a fourth payment of $125,000 in February 2014.  The Company used the $500,000 to pay off $500,000 in existing liabilities to Bayer Healthcare LLC (“Bayer’).  The Company is also entitled to receive milestone payments upon achievement of certain development milestones by T3D which could be in excess of the Company’s milestone and annual payment obligations to Bayer.
 
On October 25, 2013, the Company entered into an agreement with Alamo Pharma Services (“Alamo”) pursuant to which Alamo now provides the Company with a dedicated national sales team of 20 sales representatives to promote our commercial products. In addition, the Company signed an agreement, exclusive to the oncology market, with Mission Pharmacal (“Mission”), Alamo’s parent company, to share in the costs and expenses of the sales force.   The Alamo sales team, in addition to promoting the Company’s products Soltamox (tamoxifen citrate), Gelclair and Bionect, is also promoting three Mission products: Ferralet® 90, Binosto® (alendronate sodium) and Aquoral®.  The agreements with Alamo and Mission expand the Company’s presence in oncology supportive care and the Mission products complement the Company’s portfolio in presenting comprehensive offerings to the oncologist.
 
 
7

 
 
The sales force became operational and sales representatives were trained and in their assigned territories in early January, 2014.  With the expansion of the sales force to 20 sales representatives, the Company expects its commercial costs, net of Mission support payments to Alamo to be significantly higher on an annualized basis.
 
The Company launched Soltamox in the U.S. in late October 2012 and subsequently launched its second product, Gelclair in April 2013. 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 third quarter of 2014.
 
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, including in connection with any development partner, access to capital, obtaining and enforcing patents and/or licenses, receiving any required regulatory approval and the current regulatory environment in which we sell our products, 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, 2014.  
 
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.
 
The consolidated balance sheet at December 31, 2013 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, 2013.  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.
 
 
8

 
 
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.  
 
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 March 31, 2014 and December 31, 2013, the Company had bank balances of $6,610,810 and $3,313,230, respectively, in excess of federally insured limits of $250,000 held in non-investment accounts.  In addition, our top four customers, OncoMed, Cardinal Health, McKesson Corporation, and Amerisource Bergen Corporation collectively represented 79% and 90% of our gross trade accounts receivable as of March 31, 2014 and December 31, 2013, respectively.
 
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.
 
 
9

 
 
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, contract sales force costs including pass-throughs, marketing programs, 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, formulation and API manufacturing costs, process development, research costs, patent costs, pharmacovigilance costs, PDUFA fees, regulatory 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 March 31, 2014 and December 31, 2013, the Company had an aggregate of $3.1 million and $3.2 million, respectively, in capitalized product rights, which it expects to amortize over remaining periods of approximately 4.3 to 8.4 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. There was no impairment to goodwill recognized during the three months ended March 31, 2014.

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.  There was no impairment to intangible assets recognized during the three months ended March 31, 2014.
 
Revenue Recognition
 
The Company recognizes 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 Soltamox 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 Soltamox and the related wholesaler distribution channel at this time to reasonably estimate product returns from its wholesalers while the wholesalers are still holding inventory.  Therefore, the Company is deferring the recognition of Soltamox 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 Soltamox that are not recognized as revenue are treated as deferred revenue until evidence exists to confirm that pull through sales to retail and specialty pharmacies or other end-user customers have occurred.   Soltamox revenue is recognized from products sales directly to hospitals, clinics, pharmacies and other end-user customers at the time of direct shipment.
 
 
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Revenue from Gelclair sales is recognized when the merchandise is shipped to both wholesalers and direct sales to hospitals, clinics, pharmacies and other end-user customers as the Company believes it has achieved normalized inventory levels for Gelclair.
 
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 5 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 shareholders’ equity.
 
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 March 31, 2014 and December 31, 2013 a valuation allowance has been recorded to reduce the net deferred tax asset to zero.
 
 
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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 three month periods ended March 31, 2014 and 2013 as their effect is anti-dilutive. For the three month period ended March 31, 2014 there were no in-the-money common stock equivalents. For the three month period ended March 31, 2013, the following in-the-money common equivalents have been excluded from the calculation because their inclusion would be anti-dilutive: 548,185 common equivalents from the Series B-2 warrants with an exercise price of $4.00 and 65,000 options with a weighted average exercise price of $4.40.
 
   
Three months ended March 31,
 
   
2014
   
2013
 
Net loss attributable to controlling interest
  $ (2,658,081 )   $ (2,522,588 )
                 
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
    7,204,222       4,593,793  
                 
Basic and diluted net loss per common share attributable to controlling interest
  $ (0.37 )   $ (0.55 )
 
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 three months ended March 31, 2013, the Company sold its remaining investment in MRI and recognized a gain of $71,712 on the sale of these shares.
 
4.  Stockholders’ Equity
 
On February 5, 2014, the Company amended its certificate of incorporation in order to effect a one-for-five reverse split of its outstanding common stock. As a result of the reverse stock split, each share of the Company’s common stock outstanding as of 9:00 a.m. on February 10, 2014 was automatically reclassified into one-fifth of a share of common stock. No fractional shares were issued as a result of the reverse split. Holders of common stock who would have otherwise received fractional shares of the Company’s common stock pursuant to the reverse split received cash in lieu of the fractional share. The reverse split reduced the total number of shares of the Company’s common stock outstanding from approximately 31.0 million shares to approximately 6.2 million shares. In addition, the number of shares of common stock subject to outstanding options, restricted stock units and warrants issued by the Company and the number of shares reserved for future issuance under the Company’s stock plans were reduced by a factor of five to proportionately reflect the reverse split. The reverse split was accounted for retroactively and reflected in our common stock, warrant, stock options and restricted stock activity as of and during the period ended December 31, 2013 and the periods ended March 31, 2014 and 2013.
 
 
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On February 11, 2014, the Company entered into a Securities Purchase Agreement (the “February 2014 Purchase Agreement”) with certain institutional investors providing for the issuance and sale by the Company in a registered direct offering of  2,166,501 shares of the Company’s common stock at an offering price of $2.765 per share (the “February 2014 Share Offering”).  In a concurrent private placement, the Company granted to those institutional investors a warrant to purchase one share of the Company’s common stock for each share purchased in the February 2014 Share Offering.  The closing of the sale of the shares and warrants under the February 2014 Purchase Agreement and the concurrent private placement took place on February 18, 2014 for net proceeds of approximately $5,500,000 after deducting placement agent fees and other expenses totaling approximately $500,000.  Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $2.64 and will be exercisable for five years from the closing.
 
On October 22, 2013, the Company entered into a Securities Purchase Agreement (the “October 2013 Purchase Agreement”) with certain institutional investors providing for the issuance and sale by the Company in a registered direct offering of 1,020,000 shares of the Company’s common stock at an offering price of $2.50 per share (the “October 2013 Share Offering”).  In a concurrent private placement, the Company granted to those institutional investors a warrant to purchase one share of the Company’s common stock for each share purchased in the October 2013 Share Offering.  The closing of the sale of the shares and warrants under the October 2013 Purchase Agreement and the concurrent private placement took place on October 24, 2013 for net proceeds of approximately $2,300,000 after deducting placement agent fees and other expenses totaling approximately $248,000.  Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $2.80, becomes exercisable six months after issuance and will be exercisable for five years from the initial exercise date.
 
On August 19, 2013, the Company entered into an At-The-Market (“ATM”) Sales Agreement (the “Sales Agreement”) with BTIG, LLC (“BTIG”), contemplating the sale by the Company from time to time, through an “at-the-market” share offering program, shares of its common stock, $0.01 par value per share. Also on August 19, 2013, the Company filed a prospectus supplement with the Securities and Exchange Commission in connection with the Sales Agreement offering of shares of common stock having an aggregate offering price of up to $2,730,000.   As of December 31, 2013, the Company had sold 93,353 shares of common stock for gross proceeds of approximately $265,000 before deducting sales agent commissions and offering expenses of $140,000, in connection with the Sales Agreement. On October 17, 2013, the Company terminated the Sales Agreement in accordance with the provisions thereof.
 
On December 28, 2012, the Company entered into a securities purchase agreement with certain institutional investors 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 736,842 shares of common stock).  In connection with the purchase of shares of Series B-3 and B-4 convertible preferred stock, each 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 $5.25. 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.   The offering required and received the approval of at least 67% of the then outstanding Series B-2 warrants 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.

 
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During the quarter ended March 31, 2014, investors in the Series B-4 preferred stock converted 100 Series B-4 shares into 40,816 shares of common stock.  During the quarter ended March 31, 2013, investors in the B-2 preferred stock exercised 242,774 warrants at $4.00 per share for proceeds of $971,099 and 50,000 warrants at $5.00 per share for proceeds of $250,000.  In addition, during the same period, investors in the B-2 preferred stock converted 1,060 shares into 278,947 shares of common stock and investors in the B-3 preferred stock have converted all 2,550 shares into 671,051 shares of common stock.
 
5.  Share-based Compensation
 
Effective with the adoption of FASB ASC 718, Compensation-Stock Compensation, the Company has elected to use the Black-Scholes option pricing model to determine the fair value of options granted. Share price volatility has historically been based on an analysis of historical stock price data reported for a peer group of public companies. Beginning with the first quarter of 2014 share price volatility is based on an analysis of historical stock price data for the Company. 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.
 
The fair value of options granted to employees and non-employee directors for the three months ended March 31, 2014 was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:
 
   
Three months ended March 31,
2014
 
Expected dividend yield
    - %
Expected volatility
    109.00 %
Weighted-average expected life (in years)
    6.00  
Risk free interest rate
    1.88 %
Forfeiture rate
    10.00 %
 
The Company’s consolidated statements of operations for the three months ended March 31, 2014 and 2013, 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 March 31,
 
   
2014
   
2013
 
Options to Emplyees and Non-employee Directors
           
             
Research and development
  $ 37,137     $ 33,634  
Sales and marketing
    43,962       45,732  
General and administrative
    222,110       194,996  
Total stock-based compensation to
               
  employees and non-employee directors
    303,209       274,362  
                 
Warrants to non-employees
               
                 
General and administrative
    0       38,367  
Total stock-based compensation to
               
  non-employees
    0       38,367  
                 
Total stock-based compensation
  $ 303,209     $ 312,729  
 
 
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The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505 Equity, using a fair-value approach. The equity instruments, consisting of shares of restricted stock, stock options and warrants granted to lenders and consultants, are valued using the Black-Scholes valuation model. Measurements of share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and are recognized as an expense over the term of the related financing or the period over which services are received.
 
The Company recognized no share-based compensation related to issuance of shares of restricted stock to non-employees (i.e. consultants) in exchange for services during the three months ended March 31, 2014 and 2013, respectively.  The Company recognized no share-based compensation related to warrants issued to non-employees during the first quarter of 2014.   During the first quarter of 2013, the Company recognized $38,367 in share-based compensation related to the issuance of 150,000 warrants at an exercise price of $1.02 to non-employees (i.e. consultants) in exchange for services. The Company recognized no non-employee (i.e. consultants) option expense for the three months ended March 31, 2014.
 
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 3.2 years was $1.5 million at March 31, 2014 and over an estimated weighted-average amortization period of 3.5 years was $1.2 million at March 31, 2013.
 
A summary of activity under the Company’s stock option plans for the three months ended March 31, 2014 is as follows:
 
   
Shares
   
Subject to
   
Average
 
   
Available
   
Outstanding
   
Exercise
 
   
for Grant
   
Options
   
Price
 
Balance at December 31, 2013
    554,566       654,357     $ 5.45  
2008 Stock Plan increase
    378,755       -       -  
Options granted
    (358,250 )     358,250       2.89  
Options forfeited
    9,106       (9,106 )     (4.74 )
Balance at March 31, 2014
    584,177       1,003,501     $ 4.55  
 
6.  Commitments and Contingencies
 
From time to time, the Company is exposed to various claims, threats, and legal actions in the ordinary course of business. 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.
 
7. Income Taxes
 
The Company did not record any income tax expense or benefit for the three months ended March 31, 2014.  As of March 31, 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 three month period ended March 31, 2013.  The income tax expense is offset by an income tax benefit recognized in other comprehensive income.
 
The Company is not subject to examination for tax periods prior to 2010 in state and federal jurisdictions.
 
The Internal Revenue Code provides limitations on utilization of existing net operating losses and tax credit carryforwards against future taxable income based upon changes in share ownership.The Company believes it is highly likely these changes have occured, and a significant portion of the net operating loss and R&D credit carryforwards could be impaired..
 
 
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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, 2013, 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 DARA's current cash position and its need to raise additional capital in order to be able to continue to fund its operations; the stockholder dilution that may result from future capital raising efforts and the exercise or conversion, as applicable, of DARA’s outstanding options, warrants and convertible preferred stock; full-ratchet anti-dilution protection afforded investors in prior financing transactions that may restrict or prohibit DARA’s ability to raise capital on terms favorable to the Company and its current stockholders; the potential delisting of DARA’s common stock from the NASDAQ Capital Market; DARA’s limited operating history which may make it difficult to evaluate DARA’s business and future viability; DARA’s ability to timely commercialize and generate revenues or profits from Soltamox®, Gelclair®, Bionect® or other products given that DARA only recently hired its initial sales force and DARA’s lack of history as a revenue-generating company; DARA’s ability to achieve the desired results from the agreements with Mission and Alamo; FDA and other regulatory risks relating to DARA’s ability to market Soltamox®, Gelclair®, Bionect® or other products in the United States or elsewhere; DARA’s ability to in-license and/or partner products; the current regulatory environment in which DARA sells its products; the market acceptance of those products; dependence on partners and third-party manufacturers; successful performance under collaborative and other commercial agreements; DARA’s ability to retain its managerial personnel and to attract additional personnel; potential product liability risks that could exceed DARA’s liability coverage; potential risks related to healthcare fraud and abuse laws; competition; the strength of DARA’s intellectual property, the intellectual property of others and any asserted claims of infringement, and other risk factors identified in the documents DARA has filed, or will file, with the Securities and Exchange Commission ("SEC"). Copies of DARA's filings with the SEC may be obtained from the SEC Internet site at http://www.sec.gov. DARA expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in DARA's expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. DARA BioSciences and the DARA logo are trademarks of DARA BioSciences, Inc.
 
Overview
 
We are a North-Carolina based specialty pharmaceutical company primarily focused on the commercialization of oncology treatment and supportive care pharmaceutical products.  Through our acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, we acquired exclusive U.S. marketing rights to our first commercial proprietary product, Soltamox® (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 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 polyvinylpyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid) for 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 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.
 
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.  On February 24, 2014 the FDA granted Orphan Drug Designation to KRN5500 for the parenteral treatment of painful, chronic, chemotherapy-induced peripheral neuropathy that is refractory to conventional analgesics.  Fast Track designation is intended to facilitate the development and expedite review of drugs and biologics intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs.  Orphan drug designation provides extended market exclusivity, tax benefits, and the waiver of certain fees associated with the FDA approval process. We are evaluating options to partner the drug with an established oncology development company to undertake and support further development costs, as well as determining whether any further internal development of KRN5500 would be beneficial to our partnering efforts.
 
 
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On February 5, 2014, we amended our certificate of incorporation in order to effect a one-for-five reverse split of our outstanding common stock. On February 10, 2014, our one-for-five reverse stock split became effective as of 9:00 a.m. Eastern Time. As a result of the reverse split, each outstanding share of our common stock was automatically reclassified into one-fifth of a share of common stock. Due to the reverse split, our common stock now trades under a new CUSIP number, 23703P304. Unless stated otherwise, all share numbers and share price figures in this Quarterly Report on Form 10-Q have been adjusted, as appropriate, to reflect the reverse split.
 
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 (peroxisome proliferator activated receptor) nuclear receptor agonist, which we developed through Phase 1 clinical trials.  For the license, we received a $250,000 up front payment, a second payment of $25,000 in December 2013, a third payment of $100,000 in January 2014 and a fourth payment of $125,000 in February 2014.  We used the $500,000 to pay off $500,000 in existing liabilities to Bayer Healthcare LLC (“Bayer”).  The Company is also entitled to receive milestone payments upon achievement of certain development milestones by T3D which could be in excess of the Company’s milestone and annual payment obligations to Bayer.

On October 25, 2013, we entered into an agreement with Alamo Pharma Services (“Alamo”) pursuant to which Alamo now provides us with a dedicated national sales team of 20 sales representatives to promote our commercial products. In addition, we signed an agreement, exclusive to the oncology market, with Mission Pharmacal (“Mission”), Alamo’s parent company, to share in the costs and expenses of the sales force.   The Alamo sales team, in addition to promoting our products Soltamox (tamoxifen citrate), Gelclair and Bionect, also promotes three Mission products: Ferralet® 90, Binosto® (alendronate sodium) and Aquoral®.  The agreements with Alamo and Mission expand our presence in oncology supportive care and the Mission products complement our portfolio in presenting comprehensive offerings to the oncologist.
 
The sales force became operational and sales representatives were trained and in their assigned territories in early January, 2014.  With the expansion of the sales force to 20 sales representatives, we expect our commercial costs, net of the Mission support payments to Alamo, to be significantly higher on an annualized basis.
 
In early May, 2014, we implemented a new "No Coupon, No Co-pay, No Hassles" retail patient cost-saving program in support of Gelclair and Soltamox. This new program is meant to reduce or eliminate financial outlays by patients by offsetting their out-of-pocket co-pay expenses with such reductions being applied automatically to qualified prescriptions at more than 43,000 pharmacies nationwide. No additional paperwork, coupons or electronic input are required by patients, health care providers, or pharmacists to realize the benefit of the "No Coupon, No Co-Pay, No Hassles" program. This program is now available in over 95% of local retail pharmacies nationwide, is accepted at the vast majority of national retail pharmacy chains and we believe will assist  us in capturing more prescriptions written for Gelclair and Soltamox.
 
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 the contract sales organization of 20 sales representatives, innovative marketing programs, partnerships with specialty pharmacy providers, working with patient advocacy groups and foundations as well as collaborative arrangements with third party sales organizations.  As we gain additional commercial experience with our products, we may modify these activities as appropriate.
 
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 liquidated or distributed to our stockholders all of our investments made in other companies.  Our primary sources of working capital have been proceeds from the sale of our securities and proceeds from the prior sales of securities held in subsidiary companies and marketable securities.
 
We expect to continue to incur operating losses in the near-term.  Our results may vary depending on many factors, including our ability to build a successful sale and marketing organization, our ability to properly anticipate customer needs, the success of our product marketing efforts and the progress of licensing activities of KRN5500 with pharmaceutical partners.  We continue to pursue other in-licensing opportunities for approved products.
 
Product Commercialization and the Mission Products
 
Our primary focus is on the commercialization of the following oncology treatment and oncology supportive care pharmaceutical products:
 
  
Soltamox, an FDA-approved oral solution of tamoxifen citrate;
 
  
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; and
 
  
Three Mission Pharmacal products:  Ferralet 90 (for anemia), Binosto (alendronate sodium effervescent tablet indicated for the treatment of osteoporosis), and Aquoral (for cancer related dry month).
 
 
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We currently have an exclusive license to a FDA approved product, Soltamox, an exclusive license to distribute, promote and market a FDA cleared product, Gelclair, a marketing agreement to promote Bionect within the oncology and radiation oncology marketplace, and a marketing agreement to copromote three Mission products:  Ferralet 90, Binosto, and Aquoral.  We are working to expand our portfolio to include additional products through licenses and other collaborative arrangements.
 
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 difficulty 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. (“Rosemont”), a U.K. based manufacturer and a subsidiary of Perrigo Company plc, 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 our license agreement with Rosemont, we are 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 that in 2014 232,670 women would be diagnosed with breast cancer and 40,000 women would die as a result of the disease.  Tamoxifen therapy is generally indicated for breast cancer patients for up to 5 years.   The FDA requires a Boxed Warning (sometimes referred to as a “Black Box” Warning) for products for significant risk of severe or life-threatening adverse events. Soltamox has a Black Box warning related to uterine malignances, stroke and pulmonary embolism.  The FDA added this requirement for a Boxed Warning on all tamoxifen products in 2002.  This warning can be found in the full Soltamox prescribing information at www.soltamox.com.
 
In order to commercialize Soltamox, we had initially established a specialty commercial sales force to market Soltamox to oncologists, targeting physicians who prescribe tamoxifen. This initial sales force has now been replaced by the Alamo sales force. 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.
 
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 recently completed a registry survey called CAPTURE to gather information on compliance, adherence and preference for a liquid therapy among current tamoxifen patients and will use the results in clinical publications as well as marketing programs and material to support increased utilization of Soltamox.
 
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.  We were 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 with Helsinn, we are obligated to meet minimum sales thresholds during the ten-year term.  The License Agreement also provides that we 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.
 
 
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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.  Innocutis continues to promote and sell Bionect in the dermatology market.   Bionect is protected by a U.S. issued patent that expires in 2016. We are compensated by Innocutis for each unit sold in the U.S. oncology and radiation oncology market.  We began promoting Bionect in the U.S. oncology and radiation oncology market in the second quarter of 2012.  The term of the agreement will continue until April 1, 2015 and will be automatically renewed in yearly increments unless notice is given by either party 30 days prior to the expiration of the term or extended term.
 
Mission Pharmacal Products

On October 25, 2013, we entered into an agreement with Alamo Pharma Services, a subsidiary of Mission Pharmacal, for a twenty (20) person national sales team in the U.S. oncology market. Pursuant to the agreement and a shared sales force agreement with Mission, the Alamo sales team, in addition to promoting our Soltamox, Gelclair and Bionect products, also carries three Mission Pharmacal products: Ferralet 90 (for anemia), Binosto (alendronate sodium effervescent tablet indicated for the treatment of osteoporosis), and Aquoral (for cancer related dry mouth). Mission’s products are concurrently being promoted by Mission Pharmacal in other non-oncology related therapeutic markets and all are under patent protection throughout the term of our agreement. The agreements with Alamo and Mission expand DARA's presence in oncology supportive care to address ongoing areas of unmet medical need.

Clinical Stage Asset
 
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.  Since KRN5500 would complement our portfolio of oncology treatment and supportive care pharmaceuticals, we are evaluating options to partner the drug with an established oncology development company to undertake and support the cost for the Phase 2b program, as well as determing whether any further internal development of KRN5500 would be beneficial to our partnering efforts.
 
On November 8, 2012 we submitted a request seeking Orphan designation for KRN5500 to the Office of Orphan Products Development at the FDA.  On February 24, 2014 the FDA granted Orphan Drug Designation to KRN5500 for the parenteral treatment of painful, chronic, chemotherapy-induced peripheral neuropathy that is refractory to conventional analgesics.  Orphan drug designation provides extended market exclusivity, tax benefits, and the waiver of certain fees associated with the FDA approval process.
 
 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.
 
 
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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 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 Soltamox 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 with Soltamox and the related wholesaler distribution channel at this time to reasonably estimate product returns from our wholesalers while the wholesalers are still holding inventory. Therefore, we are deferring the recognition of Soltamox revenue until the wholesalers sell their product to retail and specialty pharmacies 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 Soltamox that are not recognized as revenue are treated as deferred revenue until evidence exists to confirm that pull through sales to retail and specialty pharmacies or other end-user customers have occurred.  Soltamox revenue is recognized from product sales directly to hospitals, clinics, pharmacies and other end-user customers at the time of direct shipment.
 
Revenue from Gelclair sales is recognized when the merchandise is shipped to both wholesalers and direct sales to hospitals, clinics, pharmacies and other end user customers as we believe that we have achieved normalized inventory levels for Gelclair.  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.
 
  
Although the Company does not have significant experience with its current products, 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.
 
Inventory
 
Inventory at March 31, 2014 and December 31, 2013 was $195,142 and $104,089, respectively and consisted of finished goods.  We state finished goods inventories at the lower of cost (which approximates actual cost on a first-in, first-out cost method) or market value. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell such inventory, remaining shelf life, and current and expected market conditions, including levels of competition. Inventory adjustments are measured as the difference between the cost of the inventory and estimated market value based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
 
 
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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 March 31, 2014 and December 31, 2013 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.
 
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. We believe it is highly likely these changes have occured, and a significant portion of the net operating loss and R&D credit carryforwards could be impaired.
 
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, contract sales force costs including pass-throughs, marketing programs, 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, clinical material manufacturing costs, process development, research costs, patent costs, pharmacovigilence costs, PDUFA fees, regulatory costs and other consulting and professional services.
 
Valuation of Goodwill and Acquired Intangible Assets
 
We have recorded goodwill and acquired intangible assets related to our 2012 acquisition. When identifiable intangible assets  are acquired, we determine the fair values of the assets as of the acquisition date.
 
Intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events occur.
 
Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination and is not amortized. Goodwill is subject to impairment testing at least annually or when a triggering event occurs that could indicate a potential impairment. We are organized as a single reporting unit and therefore the goodwill impairment test is done using our overall market value, as determined by our traded share price, as compared to our book value of net assets. We completed our annual impairment test as of December 31, 2013 and determined the carrying value of goodwill was not impaired.
 
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 distribution providers;
 
  
fees paid to contract manufacturers in connection with the production of raw materials, drug substance and drug products; and
 
  
professional service fees.
 
 
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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 5 - Share Based Compensation, included in the condensed consolidated financial statements appearing elsewhere in this report, for additional information regarding our adoption of ASC 718.
 
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 March 31, 2014 Compared to Three Months Ended March 31, 2013
 
Net sales and cost of sales increased by $140,306 and $35,671 respectively from $21,180 and $17,510 respectively for the three months ended March, 31, 2013, to $161,486 and $53,181 for the three months ended March 31, 2014, respectively primarily related to the launch of Gelclair in April 2013 and the related sales in the first quarter of 2014 while there were no Gelclair sales in the first quarter of 2013.
 
Sales and marketing costs consist of salaries, commissions, and benefits to sales and marketing personnel, sales personnel travel and operating costs, contract sales force costs including pass-throughs, marketing programs, administration costs and advertising costs. Sales and marketing expense increased $537,023 from $697,555 for the three months ended March 31, 2013 to $1,234,578 for the corresponding 2014 period primarily as a result of the increase in sales force costs related to the sales force expansion with Alamo in the first quarter of 2014.
 
Research and development costs include personnel and personnel related costs, formulation and API manufacturing costs, process development, research costs, patent costs, pharmacovigilance costs, PDUFA fees, regulatory costs and other consulting and professional services.  Research and development expenses decreased $316,889 from $684,496 for the three months ended March 31, 2013 to $367,607 for the corresponding 2014 period, primarily as a result of a decrease in formulation and API manufacturing costs associated with the KRN5500 program.
 
General and administrative expenses consist primarily of salaries and benefits, professional fees and other costs related to administrative, finance, human resource, legal and information technology functions as well as the costs associated with listing, stock transfer and filings as a public company.  In addition, general and administrative expenses include facility, basic operational and support costs and insurance costs.  General and administrative expenses increased $64,081 from $1,193,275 for the three months ended March 31, 2013 to $1,257,356 for the corresponding 2014 period, primarily as a result of incremental costs associated with the 2014 reverse stock split.
 
Depreciation and amortization expense increased $3,283 from $155,767 for the three months ended March 31, 2013 to $159,050 for the corresponding 2014 period, primarily as a result of higher 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 increased $119,276 from $92,248 for the three months ended March 31, 2013 to $211,524 for the corresponding 2014 period, primarily as a result of $225,000 in license revenue recognized in other income during the first quarter of 2014 related to the sublicense of DB959 toT3D Therapeutics, Inc., partially offset by the 2013 gain of $71,000 on the sale of the remainder of its marketable securities.
 
 
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Liquidity and Capital Resources
 
Overview
 
From inception on June 22, 2002 through March 31, 2014, we have financed our operations primarily from the net proceeds of (1) registered direct offerings and private placements of equity securities, through which we raised $58,828,805 in net proceeds, and (2) the sale of marketable securities and securities held in subsidiary companies through which we raised $2,045,216 and $5,152,388, respectively.
 
At March 31, 2014, our principal sources of liquidity were our cash and cash equivalents which totaled $6,828,110. As of March 31, 2014, we had net working capital of $5,482,832.  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 three months ended March 31, 2014, cash used in our operating activities was $2,060,553.  Cash used in operating activities was primarily due to the $2,698,762 consolidated net loss and an increase in inventory of $91,053, which was partially offset by an increase in accounts payable and accrued liabilities of $181,764, non-cash stock-based compensation of $303,209 and depreciation and amortization of $159,050.
 
During the three months ended March 31, 2014,there was no cash provided by or used in investing activities.
 
During the three months ended March 31, 2014, cash provided by financing activities was $5,463,120.   We generated $5,484,085 of net cash from the offering of common stock and warrants during the period, which was partially offset by $20,964 of payments on capital leases and other financing agreements.
 
Financial Condition and Outlook
 
We believe we have sufficient working capital to continue our operations through the third quarter of 2014.  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 as 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 March 31, 2014.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable.
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer and 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 first quarter of 2014, 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
 
On February 11, 2014, we entered into a Securities Purchase Agreement (the “February 2014 Purchase Agreement”) with certain institutional investors providing for the issuance and sale by the Company in a registered direct offering of 2,166,501 shares of our common stock at an offering price of $2.765 per share (the “February 2014 Share Offering”). In a concurrent private placement, we granted to those institutional investors a warrant to purchase one share of our common stock for each share purchased in the February 2014 Share Offering. The closing of the February 2014 Share Offering and the concurrent private placement took place on February 18, 2014 for net proceeds of approximately $5.5 million after deducting placement agent fees and other expenses totaling approximately $500,000. Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $2.64, became exercisable on the date of issuance and will be exercisable for five years. The shares of our common stock underlying the warrants have been registered for resale pursuant to our effective Registration Statement on Form S-3 (File No. 333-194333).

Item 3.  Defaults Upon Senior Securities
 
Not applicable.
 
Item 4.  Mine Safety Disclosures.
 
Not applicable.
 
Item 5.  Other Information
 
Not applicable.
 
Item 6.  Exhibits
 
The exhibits required to be filed as a part of this report are listed in the Exhibit Index.
 
 
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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 May 12, 2014.
 
 
DARA BIOSCIENCES, INC.
 
       
Date: May 12, 2014 
By:
/s/ David J. Drutz, M.D.  
   
David J. Drutz, M.D.
 
   
Chief Executive Officer (Principal Executive Officer)
 
       
Date: May 12, 2014   /s/ David L. Tousley  
   
David L. Tousley
 
   
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
 

 
 
 
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EXHIBIT INDEX
 
         
3.1
 
Restated Certificate of Incorporation of DARA BioSciences, Inc.
 
Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 12, 2008
3.2
 
Certificate of Amendment to Restated Certificate of Incorporation of DARA BioSciences, Inc.
 
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010
3.3
 
Certificate of Designation of Preferences, Rights, and Limitations of Series A Convertible Preferred Stock
 
Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 29, 2010
3.4
 
Certificate of Designation of Preferences, Rights, and Limitations of Series B Convertible Preferred Stock
 
Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 18, 2012
3.5
 
Certificate of Designation of Preferences, Rights, and Limitations of Series B-2 Convertible Preferred Stock
 
Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 9, 2012
3.6
 
Certificate of Designation of Preferences, Rights, and Limitations of Series B-3 Convertible Preferred Stock
 
Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 31, 2012
3.7
 
Certificate of Designation of Preferences, Rights, and Limitations of Series B-4 Convertible Preferred Stock
 
Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 31, 2012
3.8
 
Certificate of Amendment of Restated Certificate of Incorporation of Dara Biosciences, Inc., dated February 5, 2014
 
Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2014
3.9
 
Amended and Restated By-Laws of DARA BioSciences, Inc.
 
Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 12, 2008
4. 1
 
Form of Common Stock Purchase Warrant from the February 2014 private placement
 
Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 12, 2014
10.1
 
Placement Agent Agreement, dated February 11, 2014, between DARA Biosciences, Inc. and Ladenburg Thalmann & Co, Inc.
 
Incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on February 12, 2014
10.2
 
Form of Securities Purchase Agreement, dated February 11, 2014, between DARA BioSciences, Inc. and certain investors
 
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 12, 2014
 
Certification of David J. Drutz, M.D.. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 15, 2013
   
 
Certification of David L. Tousley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 15, 2013
   
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 15, 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****
   
 
****
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.
 

 
 
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