10-K 1 s22615110k.htm FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014 s22615110k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                                                          
 
FORM 10-K
                                                          
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
 
or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
 
Commission file number 000-23776
DARA BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
                                                          
 
Delaware
04-3216862
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
8601 Six Forks Road, Suite 160
 
Raleigh, North Carolina
27615
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (919) 872-5578
                                                          
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, Par Value $.01 Per Share
The NASDAQ Stock Market LLC
                               
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
                                                          
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  R
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  R
 
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  o
 
 
 

 
 
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 o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, and/or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer £    
 
Accelerated filer £    
     
Non-accelerated filer £
 
Smaller reporting company R
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  R
 
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2014 was approximately $23,507,101.
 
The number of shares outstanding of the Registrant’s common stock as of February 26, 2015 was approximately 19,755,595.
 


 
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Table of Contents
 
PART I
 
Item 1. Business
4
Item 1A. Risk Factors.
11
Item 1B. Unresolved Staff Comments.
23
Item 2. Properties.
23
Item 3. Legal Proceedings.
23
Item 4. Mine Safety Disclosures.
23
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
               Securities.
24
Item 6. Selected Financial Data.
24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
33
Item 8. Financial Statements and Supplementary Data.
34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
59
Item 9A. Controls and Procedures.
59
Item 9B. Other Information.
59
PART IV
 
Item 15. Exhibits and Financial Statement Schedules.
70

 
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FORWARD-LOOKING STATEMENTS
 
This Form 10-K 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-K, the words “believe,” “anticipates,” “intends,” “plans,” “estimates,” and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-K are based on management’s current expectations and are subject to factors that could cause actual results to differ materially for us from those projected. Those factors include risks and uncertainties relating to our current cash position and our need to raise additional capital in order to be able to continue to fund our operations; the stockholder dilution that may result from future capital raising efforts and the exercise or conversion, as applicable, of our outstanding options, warrants and convertible preferred stock; full-ratchet anti-dilution protection afforded investors in prior financing transactions that may restrict or prohibit our ability to raise capital on terms favorable to the Company and its current stockholders; the potential delisting of our common stock from the NASDAQ Capital Market; our limited operating history which may make it difficult to evaluate our business and future viability; our ability to timely commercialize and generate revenues or profits from Soltamox®, Gelclair® or other products; our ability to achieve the desired results from our agreements with Mission and Alamo; FDA and other regulatory risks relating to our ability to market Soltamox®, Gelclair®, or other products in the United States or elsewhere; our ability to in-license and/or partner products; the current regulatory environment in which we sell our products; the market acceptance of those products; dependence on partners and third-party manufacturers; successful performance under collaborative and other commercial agreements; our ability to retain our managerial personnel and to attract additional personnel; potential product liability risks that could exceed our liability coverage; potential risks related to healthcare fraud and abuse laws; competition; the strength of our intellectual property, the intellectual property of others and any asserted claims of infringement, and other risk factors identified in the documents we have filed, or will file, with the Securities and Exchange Commission. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of  various factors, including, among others, the potential risks and uncertainties described in “Part I, Item 1A — Risk Factors” below.
 
You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission (the “SEC”). Except as required by law, we undertake no obligation to update any forward-looking statements.
 
In this Form 10-K, we refer to information regarding potential markets for our drug candidates and other industry data. We believe that all such information has been obtained from reliable sources that are customarily relied upon by companies in our industry. However, we have not independently verified any such information.
 
 
 
 
PART I
 
Item 1. Business
 
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 FDA-approved proprietary product, SoltamoxÒ (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 GelclairÒ, a unique FDA-cleared, socium hyaluronate and polyvinylpyrrolidone-containing oral gel indicated for the management and relief of pain due to  oral mucositis.
 
 
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On October 25, 2013, we entered into an agreement with Alamo Pharma Services (“Alamo”) pursuant to which Alamo 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) and Gelclair, also promotes two Mission products: Ferralet® 90, 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.  Although the expansion of the sales force to 20 sales representatives, has significantly increased our commercial costs, net of the Mission support payments to Alamo, we believe our investment in this sales force will help us increase our revenues and our product portfolio’s market acceptance.
 
We have a clinical development asset, KRN5500, which is a phase 2 investigational product 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 CCIPN that is refractory to conventional analgesics.  On June 16, 2014 the FDA granted Orphan Drug Designation to KRN5500 for the treatment of multiple myeloma.  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 those products that demonstrate the potential to address unmet medical needs.  Upon approval by the FDA, 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 pharmaceutical development company to undertake and support further development costs, and are determining whether any further internal development of KRN5500 would be beneficial to our partnering efforts.
  
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 program is meant to reduce or eliminate financial outlays by certain 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. Gelclair and Soltamox are now available in over 95% of local retail pharmacies nationwide, and the retail patient cost savings program 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 our revenues from operations to date have been insufficient to support our commercial and development activities.  We have liquidated or distributed to our stockholders all of our investments made previously 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 sales 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:
 
 
·
Gelclair, an FDA-cleared product indicated for the management and relief of pain due to oral mucositis;
 
·
Soltamox, an FDA-approved oral liquid solution of tamoxifen citrate; and
 
·
Two Mission products:  Ferralet 90 (for anemia), 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; and a marketing agreement to co-promote two Mission products:  Ferralet 90 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
 
     Soltamox
 
SoltamoxÒ (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.  Oral liquids can provide an 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 from liquid formulations of drugs.  In addition, breast cancer patients receiving chemotherapeutic agents are subject to oral mucositis, which may make liquid medical formulations preferable.
 
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 oral liquids specialty pharmaceutical company and a subsidiary of Perrigo Company plc, for rights to market Soltamox in the United States.  We launched Soltamox in the U.S. in the fourth quarter of 2012.  Previously, Soltamox was marketed only in the U.K. and Ireland by Rosemont.  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.  These minimum sales thresholds have been previously amended and we are in discussions with Rosemont to further amend the applicable threshold sales of Soltamox through fiscal 2015.
 
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 currently indicated by the FDA for breast cancer patients for 5 years .  In October 2014 we filed a citizens petition with the FDA to amend the labels for all tamoxifen products by increasing the recommended duration of adjuvant therapy for women with estrogen receptor-positive breast cancer from 5 to 10 years.  The FDA typically provides an initial response within 6 months of receiving a citizens petition.   The FDA requires a Boxed Warning on all tamoxifen products , including Soltamox, presenting significant risk information on  uterine malignances, stroke and pulmonary embolism.    This warning can be found in the full Soltamox prescribing information at www.soltamox.com. 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 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 to increase healthcare provider awareness of breast cancer patient profiles in this respect
 
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.  We were granted an exclusive license to distribute, promote, market and sell Gelclair for the management and relief of pain due to all 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 management of pain and relief of pain arising from oral lesions of various etiologies, including oral mucositis/stomatitis (caused by chemotherapy or radiation therapy) irritation due to oral surgery, traumatic ulcers caused by braces or ill-fitting dentures, disease and diffuse aphthous ulcers. 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 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. Innocutis promotes and sells 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 the parties have mutually agreed to discontinue the Company’s promotion of Bionect thereafter.
 
Mission Pharmacal Products

On October 25, 2013, we entered into an agreement with Alamo, a subsidiary of Mission, 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 and Gelclair  products, also carries two Mission products: Ferralet 90 (for anemia), and Aquoral (for cancer related dry mouth).  Previously, our Alamo sales team also promoted another Mission product, but in late 2014 we determined to focus our efforts with respect to Mission products on Ferralet 90 and Aquoral, which we believe fit better with our commercial strategy. Mission’s products are concurrently being promoted by Mission 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 our presence in oncology supportive care to address ongoing areas of unmet medical need.  As consideration for the Alamo sales team’s promotion of the Mission products, we receive a fixed reduction in the fees we pay for the Alamo services as Mission subsidizes a portion of the fees (the “Mission support payments”).  The net fees paid to Alamo are recorded as part of our Selling, General and Administrative expenses and the Mission support payments are not recorded as revenue.  However, our Alamo promotion agreement provides that, if a specified revenue milestone is achieved, rather than receiving such discount, we would share in the revenue generated by the Alamo sales team’s promotion of the Mission products.

KRN 5500 Clinical Stage Asset
 
KRN5500 is a novel, non-narcotic/non-opioid intravenous product being investigated for the treatment of painful CCIPN that is refractory to conventional analgesics. We have successfully completed a Phase 2a proof of concept study of KRN5500 in patients with advanced cancer and analgesia-resistant neuropathic pain where it showed clinically-significant and 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 made changes in order to improve and simplify 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 determining whether any further internal development of KRN5500 would be beneficial to our partnering efforts.
 
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. On June 16, 2014 the FDA granted Orphan Drug Designation to KRN5500 for treatment of multiple myeloma.  Upon approval by the FDA, Orphan Drug Designation provides extended market exclusivity, tax benefits, and the waiver of certain fees associated with the FDA approval process.
 
Competition
 
In general, the pharmaceutical and biotechnology industries are intensely competitive. The technological areas in which we work continue to evolve at a rapid pace. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and we expect it to increase. Many of these competitors are substantially larger than we are and have substantially greater capital resources, research and development capabilities and experience, manufacturing, marketing, sales, financial and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance the financial, marketing and other resources available to these competitors.
 
 
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An important factor in our ability to compete will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can in license and market products will be an important element of market success. Other significant competitive factors include:
 
 
·
product safety and efficacy;
 
 
·
timing and scope of regulatory approval;
 
 
·
product availability;
 
 
·
marketing and sales capabilities;
 
 
·
reimbursement coverage from insurance companies and others;
 
 
·
the extent of clinical benefits and side effects of our products relative to their cost;
 
 
·
price;
 
 
·
patent protection; and
 
 
·
capabilities of partners with whom we may collaborate.
 
Intellectual Property
 
Patent Portfolio
 
Presently, we have rights to a number of issued U.S. and foreign patents and pending patent applications with varying expiration dates. Our patent rights categorized by individual drug development programs are summarized below.
 
 
·
KRN5500 – four issued U.S. patents directed to spicamycin and derivatives thereof, including KRN5500, and their use in methods of decreasing or preventing pain; two pending U.S. patent applications and one pending U.S. provisional patent application directed to formulations of spicamycin derivatives, including KRN5500, and their use in methods of treating or preventing pain or treating liquid tumors; fourteen issued foreign patents and five  pending foreign applications directed to spicamycin and derivatives thereof, including  KRN5500, and their use in methods of decreasing or preventing pain.
 
 
·
DB959– three issued U.S. patents and one pending U.S. patent application with corresponding foreign patents and patent applications and one pending PCT application related to indane acetic acid derivative compounds and use thereof for treating type 2 diabetes, obesity, cardiovascular disease, liver disorders, Alzheimer's disease, autoimmune disorders, psoriasis and other diseases, and the process and intermediates for preparing compounds.  The patents and patent applications related to DB959 were licensed to T3D on June 17, 2013.
 
For information concerning the license agreements relating to these patents, see “Licenses” below.
 
Licenses
 
We hold an exclusive license for the U.S. marketing rights to Soltamox from Rosemont.  We acquired this license on January 17, 2012 in connection with our acquisition of Oncogenerix.  The term of the license is the later of (i) seven years from June 29, 2011; or (ii) the expiry of the last-to-expire Licensed Patent.  We are obligated to pay certain milestones and   quarterly royalties based upon net revenues.  Rosemont is responsible for the manufacturing and supply of Soltamox to us based on mutually agreed upon forecasts and purchase orders from us.
 
We have an exclusive license with Helsinn of Switzerland, to distribute, promote, market and sell Gelclair for thet management and relief of pain due to all approved indications in the United States. Gelclair is an FDA-cleared product indicated for the management and relief of pain due to oral mucositis. We acquired this license on September 7, 2012 for a term of ten years.  Under the license agreement we are required to make certain up-front payments, milestone payments and royalty payments based upon net revenues.  Helsinn is responsible for the manufacturing and supply of Gelclair to us based on mutually agreed upon forecasts and purchase orders from us.
 
 
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We have licensed exclusive worldwide rights (excluding Australia, New Zealand and Asia) to compounds from Kirin Brewery Co., Ltd. (now Kyowa Hakko Kirin Co., Ltd.) of Japan.  This license was effective July 1, 2004.  We have also entered into an exclusive worldwide license effective May 3, 2004, with Massachusetts General Hospital related to the use of certain spicamycin derivatives for use in treating pain.
 
We have licensed exclusive worldwide rights to compounds including DB959from Bayer Healthcare, LLC (“Bayer”) for the treatment of metabolic diseases, including type 2 diabetes. The license has no restrictions on disease indications for therapeutic use.  This license was acquired October 8, 2007.

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 had 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.  The Company is also entitled to receive milestone payments upon achievement of certain development milestones by T3D which could be in excess of the milestone and annual payments payable to Bayer.

Governmental Regulation
 
The manufacture, advertising, marketing, distribution and sale of medical devices and drugs are subject to regulation principally by the FDA, but also by other federal agencies, and state and local authorities in the United States. The Federal Trade Commission (“FTC”), the FDA and state and local authorities regulate the advertising of medical devices, prescription drugs, over-the-counter drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, as amended (“FDCA”) and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, sale, distribution, advertising and promotion of our products.  Both the FDCA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.  The FDA requires a Boxed Warning  for products for significant risk of severe or life-threatening adverse events. The FDA requires a Boxed Warning on all tamoxifen products , including Soltamox, related to uterine malignances, stroke and pulmonary embolism.  This warning can be found in the full Soltamox prescribing information at www.soltamox.com.
 
We are also subject to various federal and state laws pertaining to health care “fraud and abuse” issues, including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescribing of a particular drug. False claims laws prohibit anyone from knowingly and willfully presenting, or causing to be presented for payment to the United States government, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. We have adopted the Pharmaceutical Research and Manufacturers of America Code on Interactions with Healthcare Professionals (PhRMA Code), which is a voluntary industry code developed to establish standards for interactions with and communications to healthcare professionals and we have adopted processes that we believe enhance compliance with this code and applicable federal and state laws.
 
The drug candidates we are developing internally are subject to an extensive regulatory review and approval process by the FDA and by comparable agencies outside the United States.  The process of obtaining FDA and other required regulatory approvals for drug and biological products, including required pre-clinical and clinical testing, is lengthy, expensive and uncertain.  Changes in existing regulations or adoption of new regulations or policies could prevent us from obtaining, or could affect the timing of, future regulatory approvals. Even if regulatory clearance is obtained, a marketed product is subject to continual review and possible later discovery of previously unknown problems. Failure to comply with applicable regulatory requirements on an on-going basis may result in restrictions on a product’s marketing or withdrawal of the product from the market.  Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to authorize the marketing of new products or criminal prosecution.
 
 
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Sales and Marketing Activities
 
On October 25, 2013, we entered into an agreement with Alamo pursuant to which Alamo 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, 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 and Gelclair, also promotes two Mission products: Ferralet 90, and Aquoral.  Prior to entering into the arrangement with Alamo, we had our own sales organization that consisted of field-based regional business directors.  The agreements with Alamo and Mission expand our presence in oncology supportive care and the 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 on January 2, 2014.  With the expansion of the sales force to 20 sales representatives, our commercial costs, net of Mission support payments to Alamo, have increased on an annualized basis.
 
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.
 
Our marketing team works to develop and implement strategies and tactics to support our products and the healthcare professionals who administer our products, including promotional materials, speaker programs, patient co-payment assistance, health care provider education, information to further support patient compliance and participation at national medical conventions.

Our customers consist of drug wholesalers, retail drug stores, hospitals, health care clinics, specialty pharmacies, mass merchandisers and grocery store pharmacies in the United States. We primarily sell products directly to drug wholesalers, which in turn distribute the products to retail drug stores, hospitals, mass merchandisers and grocery store pharmacies. Our top four customers, who represented 99.9% of our recognized gross sales of product in 2014, are: Lindencare, Cardinal Health, McKesson Corporation, and Amerisource Bergen Corporation.

Consistent with industry practice, we maintain a returns policy that allows our customers to return products within a specified period prior and subsequent to the expiration date. Occasionally, we may also provide additional discounts to some customers to ensure adequate distribution of our products.

We rely on Integrated Commercialization Solutions, or ICS, a third-party logistics provider, for the distribution of our products to drug wholesalers, retail drug stores, mass merchandisers and grocery store pharmacies. ICS ships our products from its warehouse in Louisville, Kentucky to our customers throughout the United States and its territories as orders are placed through our customer service center also at ICS.
 
Research and Development Activities
 
Research and development costs include personnel and personnel related costs, formulation and API manufacturing  costs, process development, research costs, patent costs, pharmacovigilence costs, fees pursuant to the Prescription Drug User Fee Act (PDUFA fees), regulatory costs and other consulting and professional services. For a discussion of the amount spent on research and development activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
 
Employees
 
We currently have 15 full-time employees and one part-time employee, not including the 20 sales representatives provided to us under contract by Alamo.
 
Available Information
 
Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we may file or furnish to the SEC pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as well as any amendments to any of those reports are available free of charge on or through our website as soon as reasonably practicable after we file them with or furnish them to the SEC electronically. Our website is located at www.darabio.com.  In addition, you may receive a copy of any of our reports free of charge by contacting our corporate headquarters.
 
 
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Item 1A. Risk Factors.
 
An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in this report in evaluating our company and its business before purchasing shares of our company's common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. You could lose all or part of your investment due to any of these risks.
 
Risks Related to Our Company and Our Business

We expect to continue to incur losses and will need to raise additional capital to operate our business.

We have incurred losses since inception and expect to continue to incur losses for the foreseeable future. We estimate that we have sufficient working capital to continue our operations through the first quarter of 2016.   If we incur unanticipated expenses, our capital resources may be expended more rapidly than we expect. We anticipate that significant additional financing will be required in the future to maintain and expand our business, and such financing may not be available on favorable terms, if at all.

If we need funds and cannot raise them on acceptable terms, we may not be able to:

continue marketing and sales efforts with respect to our existing products, or begin commercialization of any other products;

successfully build a portfolio of additional products for commercialization;

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

continue operations.

We intend to finance our business, in part, through the private placement and public offering of equity and debt securities as needed. We have historically financed our operations primarily from proceeds of registered direct offerings and private placements of equity securities and the sale of securities we acquired through investments made in other companies. When we raise additional equity capital, investors’ interests in the Company will be diluted and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold. If we issue any such additional equity securities, such issuances also will cause a reduction in the proportionate ownership and voting power of all other stockholders. Further, any such issuance may result in a change in control.


Our limited experience selling and marketing pharmaceutical products may make it difficult to evaluate our business to date and our future viability.

We are in the early stage of our commercial operations and have only a limited operating history on which to base an evaluation of our current business and prospects. For example, we are in the early stages of building our sales and marketing strategy and organization and have only recently established a national sales team.  We will also need to dedicate substantial time, effort and capital to develop KRN 5500 into a commercial product, subject to the results of clinical trials, which may not be positive, and FDA approval, which we may not receive.  Our operations and development are subject to all of the risks inherent in the growth of an early stage company. We will be subject to the risks inherent in the ownership and operation of a company with a limited operating history such as regulatory setbacks and delays, fluctuations in expenses, competition, the general strength of regional and national economies and governmental regulation. Any failure to successfully address these risks and uncertainties could seriously harm our business and prospects. We may not succeed given the technological, marketing, strategic and competitive challenges we face. The likelihood of our success must be considered in light of the expenses, difficulties, complications, problems and delays frequently encountered in connection with the growth of a new business, the continuing development of new drug development technology and the competitive and regulatory environment in which we operate or may choose to operate in the future.
 
 
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Our business will be harmed if we do not successfully execute our business strategy.

Our business strategy is to in-license products for commercialization, enter into collaborative agreements with drug manufacturers and out-license or sell our remaining clinical development asset. These measures are critical to successfully building our portfolio of oncological products for commercialization. We may not be able to secure needed licensing or other partnering arrangements, and any such arrangements, even if completed successfully, may not be on terms favorable to us, may not perform as expected, may result in unexpected liabilities and may never contribute significant revenues or cash flow. We depend to a significant extent on the expertise of and dedication of sufficient resources by our licensors, licensees and partners to develop and commercialize products. Each individual licensor, licensee or corporate partner will control the amount and timing of resources devoted by it to these activities. Moreover, the success of any such licenses or other alliances depends in part upon such partners’ own marketing and strategic considerations, including the relative advantages of alternative marketing partners and strategies. Corporate partners may pursue alternative technologies or develop products that are competitive with our products. Disputes may arise between us and one or more of our collaborative partners regarding our collaborative arrangements. In such an event, we may be required to initiate or defend expensive litigation or arbitration proceedings or to seek and attempt to reach agreement with another collaborative partner. We may not be able to resolve successfully a dispute with a collaborative partner or to enter into a satisfactory arrangement with a replacement collaborative partner. If we are not successful in executing our business strategy we will not achieve the revenues we anticipate and our business will be materially harmed.

Our ability to generate revenues or profits from our products will be dependent upon successful operation of the dedicated sales force that is being contractually provided to us by a third party. Any challenges that may arise in connection with the ongoing operations of the dedicated sales force, or any failure of our marketing strategy to achieve the desired results, could have a material adverse effect on our financial condition, operating results and stock price.

In October, 2013, we entered into an agreement with Alamo 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 (Alamo’s parent company), since January 2014 the Alamo sales team has promoted our Soltamox® (tamoxifen citrate) and Gelclair® products, as well as Mission’s Ferralet® 90 (for anemia) and Aquoral® (for cancer related dry mouth). Mission’s products are concurrently being promoted by Mission 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.

Our ability to successfully market our product portfolio, and to generate revenues or profits from our products, will depend upon successful operation of the shared sales force that Alamo is providing to us under contract. There can be no assurances that the sales representatives will achieve the desired results or that they will be successful in marketing our products. Pursuant to the contractual arrangements governing the sales force, we will be responsible for significant financial obligations whether or not the sales force achieves the desired results, including fixed monthly fees subject to an annual escalator, reimbursement for certain expenses, implementation fees, and recruiting fees in connection with new hires for the sales force. If the sales force does not effectively market our products as desired, our financial condition, results of operations and stock price could be materially adversely affected.

The success of our current products and any future products we may commercialize will depend on the degree of market acceptance by physicians, patients, healthcare payers and others in the medical community.

Any products that we bring to the market may not gain market acceptance by physicians, patients, healthcare payers and others in the medical community. If these products do not achieve an adequate level of acceptance, we will not generate material product revenues and we will not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

the prevalence and severity of any side effects;

the efficacy and potential advantages of alternative treatments;

the prices of our product candidates;

the willingness of physicians to prescribe our products; and

sufficient coverage or reimbursement by the Centers for Medicare and Medicaid Services (“CMS”) and third party payers.

Commercialization of a new product or a new method of use for an existing product involves risks of failure inherent in the development of products based on innovative technologies and the risks associated with drug development generally.
 
 
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Commercialization of a new or newly launched product, including Soltamox and Gelclair, or a new method of use for an existing product involves risks of failure inherent in the development of products based on innovative technologies and the risks associated with drug development generally. These risks include the following:

the products, even if safe and effective, may be difficult to manufacture on a large scale or uneconomical to market;

proprietary rights of third parties may prevent us from exploiting technologies or marketing products; and

third parties, who may have larger sales and marketing capacities, may offer equivalent or superior products.

Our ability to commercialize our products will depend on, among other things, our ability to:

complete any necessary clinical trials and studies with respect to any partnered clinical assets;

obtain and maintain necessary intellectual property rights to our products;

obtain and maintain necessary regulatory approvals related to the efficacy and safety of our products;

enter into arrangements with manufacturers to provide manufacturing resources; and

establish marketing and sales channels.

If we do not successfully execute some or all of these initiatives, our commercialization efforts may not succeed and our business will be materially harmed.

We cannot guarantee that we will be able to effectively market our existing products and product candidates.

A significant part of our success depends on the various marketing strategies we plan to implement. Our business model was historically focused solely on product development, and until our launch of Soltamox in late 2012, we had never attempted to commercialize any product. We are in the early stages of building our sales and marketing strategy and organization, and only established a national sales team in January 2014 through our contractual relationships with Mission and Alamo. There can be no assurance as to the success of any such marketing strategy or that we will be able to build a successful sales and marketing organization. If we cannot effectively market those products we seek to commercialize directly, such products’ prospects will be harmed.

We are substantially depndent on a relatively small group of products.

Sales of a limited number of our products collectively represent a significant portion of our revenues and we expect this concentration will continue in the foreseeable future. If the volume or pricing of our largest selling products declines in the future or we are unable to satisfy market demand for these products, our business, financial position and results of operations could be materially adversely affected.

If we are unable to continue to commercialize additional products in a timely and cost-effective manner, we may not achieve our expected revenue growth or profitability or such revenue growth and profitability, if any, could be delayed.

Our future success will depend to a substantial degree on our ability to continue to commercialize new products in a timely and cost-effective manner. The acquisition, development and commercialization of new products is complex, time-consuming and costly and involves a high degree of business risk. We may, however, encounter unexpected delays in the launch of any such products, or these products, if fully commercialized by us, may not perform as we expect.

The success of our new product offerings will depend upon several factors, including our ability to properly anticipate customer needs, obtain timely regulatory approvals and locate and establish collaborations for product development and finished product manufacturing in a cost-effective manner. In addition, the acquisition, development and commercialization of new products require significant up-front costs, including costs associated with product development, obtaining regulatory approval, building inventory and sales and marketing. Furthermore, the development and commercialization of new products is subject to inherent risks, including the possibility that any new product may:
 
 
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fail to receive or encounter unexpected delays in obtaining necessary regulatory approvals;

be difficult or impossible to manufacture on a larger scale;

be uneconomical to market;

fail to be developed prior to the successful marketing of similar or superior products by third parties; and

infringe on the proprietary rights of third parties.

We may not achieve our expected revenue growth or profitability or such revenue growth and profitability, if any, could be delayed if we are not successful in continuing to develop and commercialize new products.

We rely on third parties for the manufacture of our products, and if such parties fail to supply us with finished products in the quantities we require on a timely basis, sales of our products could be delayed or prevented, our revenues could decline and we may not achieve profitability.

We do not, nor do we intend to, manufacture any products ourselves.  Instead, we rely on third parties to manufacture the products we seek to commercialize. If the third parties we contract with do not provide these services to us in a satisfactory manner, we may not be able to obtain these services from others in a timely manner or on commercially acceptable terms. Likewise, if we encounter delays or difficulties with our manufacturing partners in producing our products, the distribution, marketing and subsequent sales of these products could be adversely affected. If, for any reason, our third party manufacturers are unable to obtain or deliver sufficient quantities of finished products on a timely basis or we develop any significant disagreements with such parties, the manufacture or supply of our products could be disrupted, which may decrease our sales revenue, increase our operating expenses or otherwise negatively impact our operations. In addition, if we are unable to engage and retain third parties for the supply of finished products on commercially acceptable terms, we may not be able to sell our products as planned.

We work with our third party manufacturing parties to maintain the supply of our products and have engaged them in discussions to develop backup supply plans.  However, the manufacture of pharmaceutical products is highly exacting and complex and our manufacturing partners may experience problems during the manufacture of finished products for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, manufacturing quality concerns, problems with raw materials, natural disaster related events or other environmental factors. If problems arise during the production, storage or distribution of a batch of product, that batch of product may have to be discarded. If we are unable to find alternative sources of finished products, this could, among other things, lead to increased costs, lost sales and damage to customer relations. If problems are not discovered before the product is released to market, voluntary recalls, corrective actions or product liability related costs may also be incurred. Problems with respect to the manufacture, storage or distribution of our products could materially disrupt our business and reduce our revenues and prevent or delay us from achieving profitability.

Any loss of our license rights to use certain critical intellectual property from Rosemont, Helsinn or other licensors for any reason would have a material adverse effect on our business.

Soltamox is an FDA-approved liquid formulation of tamoxifen, which is primarily used to treat breast cancer.  We exclusively license and distribute Soltamox in the United States. If we breach or fail to perform the material conditions of, including the minimum sales requirement, or fail to extend the term of the agreements under which we license critical intellectual property from Rosemont or other licensors, we may lose all or some of our rights to such intellectual property, and such loss would have a material adverse effect on our business.

Gelclair is an FDA-cleared product indicated for the management and relief of pain due to  oral mucositis. We are party to an exclusive license and distribution agreement with Helsinn, a Switzerland based company, for rights to market Gelclair in the United States. If we breach or fail to perform the material conditions of the agreement, including the launch and minimum sales requirements, we may lose all or some of our rights to such intellectual property, and such loss could have a material adverse effect on our business.
 
 
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Our clinical development asset, KRN5500, is in an early stage of development, and we may not be able to successfully partner it.

The drug development process is highly uncertain and requires a substantial investment of capital. KRN5500 is in the early stages of development and has not been approved for commercial sale.  We do not presently have the capital resources to fully develop KRN 550 into a commercial product.  We are attempting to partner the drug with an established oncology development company to undertake and support the cost of a Phase 2b program to test for safety and efficacy. Before a drug product is approved by the FDA for commercial marketing, it must be tested for safety and effectiveness in clinical trials that are expensive to conduct and can take many years to complete. Promising results in preclinical development or early clinical trials may not be predictive of results obtained in later clinical trials. Pharmaceutical companies may experience significant setbacks in advanced clinical trials, even after obtaining promising results in earlier preclinical and clinical trials. At any time, new safety information may lead the FDA to place a clinical trial on clinical hold, or permanently stop the trial. We or our collaborators may experience numerous unforeseen events during, or as a result of, the clinical development process that could delay or prevent our drug candidate from being successfully commercialized, including:

failure to achieve clinical trial results that indicate a product candidate is effective in treating a specified condition or illness in humans;

safety issues, including the presence of harmful side effects;

determination by the FDA that the submitted data do not satisfy the criteria for approval;

new information that suggests lack of commercial viability of the drug;

failure to acquire, on reasonable terms, intellectual property rights necessary for commercialization; and

development of competing therapeutics that are more effective.
 
Our success depends on our ability to retain our managerial personnel and to attract additional personnel (including a sales force).

Our success depends largely on our ability to attract and retain managerial personnel, and to have a fully staffed sales force pursuant to our contractual arrangements with Alamo.  We operate with a small staff and a 20-person contracted sales force.  Competition for desirable personnel is intense, and there can be no assurance that we will be able to attract and retain the necessary staff. The loss of one or more members of our managerial or commercial staff, or any administrative difficulties associated with the implementation of our sales force through Alamo or difficulties in keeping the sales force fully staffed, could have a material adverse effect on our future operations and on the successful development of products for our target markets. The failure to maintain management, particularly our Chief Executive Officer and our Chief Medical Officer, and to attract additional key sales and other personnel could materially adversely affect our business, financial condition and results of operations.

The success of our business depends on our ability to develop and protect our intellectual property rights, which could be expensive.

Our success will depend in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of pharmaceuticals is highly uncertain and involves complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length or term of patent protection we may have for our products. Changes in either patent laws or in the interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property or narrow the scope of our patent protection, and any defense of our patent rights would be costly and time-consuming and may adversely affect our overall financial condition and liquidity.
 
 
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Our patents also may not afford us protection against numerous competitors with similar technology. Patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing and in some cases not at all. Therefore, because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to develop the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. Even in the event that our patents are upheld as valid and enforceable, they may not foreclose potential competitors from developing new technologies or “workarounds” that circumvent our patent rights. This means that our patent portfolio may not prevent the entry of a competitive product into the market. In addition, patents generally expire, regardless of their date of issue, 20 years from the earliest claimed non-provisional filing date. As a result, the time required to obtain regulatory approval for a product candidate may consume part or all of the patent term. We are not able to accurately predict the remaining length of the applicable patent term following regulatory approval of any of our product candidates.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely on trademarks, copyrights, trade secrets and know-how to develop, maintain and strengthen our competitive positions. We seek to protect this information in part through confidentiality agreements with our employees, consultants and third parties. If any of these agreements are breached, we may not have adequate remedies for any such breach. Moreover, there can be no assurance that third parties will not know, discover or develop independently equivalent proprietary information or techniques, that they will not gain access to our trade secrets or disclose our trade secrets to the public. Therefore, we cannot guarantee that we can maintain and protect unpatented proprietary information and trade secrets. Misappropriation of our intellectual property would have an adverse effect on our competitive position and may cause us to incur substantial litigation costs.

We may be subject to claims that we infringe the intellectual property rights of others, and unfavorable outcomes could harm our business.

Our operations may be subject to claims, and potential litigation, arising from our alleged infringement of patents, trade secrets or copyrights owned by third parties. We intend to fully comply with the law in avoiding such infringements. However, within the drug development industry, established companies have actively pursued such infringements, and have initiated such claims and litigation, which has made the entry of competitive products more difficult. We may experience such claims or litigation initiated by existing, better-funded competitors. We could also become involved in disputes regarding the ownership of intellectual property rights that relate to our technologies. These disputes could arise out of collaboration relationships, strategic partnerships or other relationships. Any such litigation could be expensive, take significant time, and could divert management’s attention from other business concerns. Our failure to prevail in any such legal proceedings, or even the mere occurrence of such legal proceedings, could substantially affect our ability to meet our expenses and continue operations.

In November 2012, a suit was filed in the United States District Court District of Columbia naming our Company as a defendant. Plaintiff in the suit is GlycoBioSciences, Inc. Also named as defendant is Innocutis Holdings, LLC, with which entity we have an Exclusive Marketing Agreement granting us rights to promote Bionect in the U.S. oncology and radiation oncology marketplace. 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 Exclusive Marketing Agreement, Innocutis is required to indemnify us in connection with this lawsuit, an obligation which survives the expiration or termination of the Exclusive Marketing Agreement. As a result, Innocutis has assumed our defense. The defendants filed a motion to dismiss the complaint on February 1, 2013. On June 26, 2014, counsel for the defendants notified the Court that the United States Patent and Trademark Office had completed a reexamination of two patents which underlie the suit and also filed a Motion to Dismiss. On August 25, 2014, plaintiff filed an amended complaint asserting that defendants infringed on certain patents relating to the sale of Bionect.  On September 25, 2014, defendants filed an answer and asserted various affirmative defenses and counterclaims.  A scheduling conference which was previously scheduled to be held in December has been moved to March 3, 2015.  No assurance can be given regarding the outcome of this litigation or its effect on our financial position or results of operations.
 
 
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In July, 2014, a suit was filed in the United States District Court for the District of Columbia naming us as a defendant. The plaintiff in the suit is GlycoBioSciences Inc.  Also named as a defendant is Helsinn.  The plaintiff alleges that defendants’ distribution and sale of Gelclair infringes on one 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 Helsinn, Helsinn is required to indemnify us in connection with this lawsuit.  As a result, Helsinn has assumed our defense.  No assurance can be given regarding the outcome of this litigation or its effect on our financial position or results of operations.
 
Our inability to manage our planned growth could harm our business.

As we work toward building a portfolio of oncology treatment and supportive care pharmaceutical products and a sales organization that will market such products for sale we expect to require additional personnel. As a result, our operating expenses and capital requirements may increase significantly. Our ability to manage our growth effectively requires us to forecast accurately our sales and growth and manufacturing needs and to expend funds to improve our operational, financial and management controls, reporting systems and procedures. If we are unable to manage our anticipated growth effectively, our business could be harmed.


Risks Relating to the Pharmaceutical Business

The pharmaceutical and biotechnology industries are intensely competitive and we may be unable to successfully compete against competitors with substantially more resources than we have.

In general, the pharmaceutical and biotechnology industries are intensely competitive. The technological areas in which we work continue to evolve at a rapid pace. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and we expect it to increase. Many of these competitors are substantially larger than we are and have substantially greater capital resources, research and development capabilities and experience, manufacturing, marketing, financial and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance the financial, marketing and other resources available to these competitors.

An important factor in our ability to compete will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can in-license and develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market will be an important element of market success. Other significant competitive factors include:
 
product safety and efficacy;
 
timing and scope of regulatory approval;

product availability;

marketing and sales capabilities;

reimbursement coverage from insurance companies and others;

the extent of clinical benefits and side effects of our products relative to their cost;

price;

patent protection; and

capabilities of partners with whom we may collaborate.

There can be no assurance that we can develop products that are more effective or achieve greater market acceptance than competitive products, or that our competitors will not succeed in developing products and technologies that are more effective than ours or that render our products and technologies less competitive or obsolete.
 
 
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If the healthcare system or reimbursement policies change, the prices of our potential products may be lower than expected and our potential sales may decline.
 
The levels of revenues and profitability of bio-pharmaceutical companies like ours may be affected by the continuing efforts of government and third party payers to contain or reduce the costs of healthcare through various means. For example, in the U.S. there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. While we cannot predict whether any legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability. In addition, in the U.S. and elsewhere, sales of therapeutic and other pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. Third party payers are increasingly challenging the prices charged for medical products and services. Moreover, in certain foreign markets, pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. We cannot assure you that any of our potential products will be considered cost effective or that reimbursement to the consumer will be available or will be sufficient to allow us to sell our potential products on a competitive and profitable basis.

Government regulation of our business is extensive and drug approvals are uncertain, expensive and time-consuming.

The research, development, pre-clinical and clinical trials of any intended products, including ones we may seek to partner with licensees or collaborators, are subject to an extensive regulatory approval process by the FDA and other regulatory agencies in the U.S. and abroad, such as in the European Union and Japan. The process of obtaining FDA and other required regulatory approvals for drug and biological products, including required pre-clinical and clinical testing, is lengthy, expensive and uncertain. Even if regulatory clearance is obtained, a marketed product is subject to continual review, and later discovery of previously unknown adverse events or failure to comply with the applicable manufacturing, packaging, distribution and marketing requirements may result in restrictions on a product’s marketing or withdrawal of the product from the market as well as possible criminal sanctions.

Currently we have only one clinical development candidate, KRN 5500, which we are looking to partner with an established oncology development company to undertake and support the cost for the Phase 2b program. A delay or setback in the partnering efforts with respect to KRN5500 would have a material adverse effect on our ability to realize any benefits from the drug candidate.

Our business, as well as that of our manufacturers, is strictly regulated by the federal and other governments, and there can be no assurance that either we or our manufacturers will be able to maintain full compliance with all applicable regulations.

The clinical testing, manufacture and sale of pharmaceutical products and medical devices, including ones we currently or may in the future sell independently or through partnerships with licensees or collaborators, are subject to extensive regulation by numerous governmental authorities in the U.S., principally the FDA, and corresponding foreign regulatory agencies. Changes in existing regulations or adoption of new regulations or policies could prevent us from obtaining, or affect the timing of, future regulatory approvals or clearances. We cannot assure you that we or our development partners will be able to obtain necessary regulatory clearances or approvals on a timely basis, or at all, or that we will not be required to incur significant costs in obtaining or maintaining such regulatory approvals. Delays in receipt of, or failure to receive, such approvals or clearances, the loss of previously obtained approvals or clearances or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

Any enforcement action by regulatory authorities with respect to past or future regulatory noncompliance could have a material adverse effect on our business, financial condition and results of operations. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to authorize the marketing of new products and criminal prosecution.

Our products that are approved for market are still subject to continuing regulation.  Any proposed products that may in the future be approved for market will also be subject to continued regulation.  We and our collaborative partners, including our manufacturers, will continuously be subject to routine inspection by the FDA and will have to comply with the host of regulatory requirements that usually apply to pharmaceutical products marketed in the U.S., including labeling regulations, the FDA’s Good Manufacturing Practice requirements, Good Clinical Practices and Good Laboratory Practices, review and response to adverse drug experience reports and regulation governing marketing and promotion of approved drug products. Our failure to comply with applicable regulatory requirements could result in enforcement action or sanctions by the FDA, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions or criminal prosecutions, any of which could have a material adverse effect on our business, financial condition and results of operations.
 
 
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Our business exposes us to potential liability for personal injury and product liability claims that could affect our financial condition.

Our business involves the testing of new drugs on human volunteers and the use of our marketed products by patients. This exposes us to the risk of liability for personal injury or death to patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of a drug. Many study volunteers and participants are already seriously ill and are at risk of further illness or death. If we are required to pay damages or incur defense costs in connection with any personal injury claim that is outside the scope of indemnification agreements we have with clients and collaborative partners, if any indemnification agreement is not performed in accordance with its terms or if our liability exceeds the amount of any applicable indemnification limits or available insurance coverage, we could be materially and adversely affected both financially and reputationally. Any such claims may also prevent us from being able to obtain adequate insurance for these risks at reasonable rates in the future.

If we or our contract sales force market our products in a manner that violates healthcare fraud and abuse laws, or if we violate false claims laws or fail to comply with our reporting and payment obligations under the Medicaid rebate program or other governmental pricing programs, we may be subject to civil or criminal penalties or additional reimbursement requirements and sanctions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

In addition to FDA restrictions on the marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include anti-kickback statutes and false claims statutes. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws.

The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federally financed healthcare program. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration intended to induce prescribing, purchasing or recommending such healthcare items or services may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement in order to have a claim paid. Pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers, reporting inflated average wholesale prices to pricing services that were then used by federal programs to set reimbursement rates and engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered, off-label uses. Such activities have been alleged to cause the resulting claims for reimbursement to be “false” claims. Most states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer.

We have initiated our participation in the federal Medicaid Rebate Program established by the Omnibus Budget Reconciliation Act of 1990, as well as several state supplemental rebate programs, in connection with the sale of Soltamox and would anticipate participating in these programs with respect to any future products we may commercialize. Though to date invoices for rebates have not been material, under the Medicaid rebate program, we anticipate paying a rebate to each state Medicaid program for our products that are reimbursed by those programs. Federal law requires that any company that participates in the Medicaid rebate program extend comparable discounts to qualified purchasers under the Public Health Service Act pharmaceutical pricing program, which requires us to sell our products to certain customers at prices lower than we otherwise might be able to charge. If products are made available to authorized users of the Federal Supply Schedule, additional pricing laws and requirements apply. Pharmaceutical companies have been prosecuted under federal and state false claims laws in connection with allegedly inaccurate information submitted to the Medicaid Rebate Program or for knowingly submitting or using allegedly inaccurate pricing information in connection with federal pricing and discount programs.
 
 
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Pricing and rebate calculations vary among products and programs. The calculations are complex and may be subject to interpretation by us or our contractors, governmental or regulatory agencies and the courts. Our methodologies for calculating these prices could be challenged under false claims laws or other laws. We or our contractors could make a mistake in calculating reported prices and required discounts, revisions to those prices and discounts, or determining whether a revision is necessary, which could result in retroactive rebates (and interest, if any). Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. If this were to occur, we could face, in addition to prosecution under federal and state false claims laws, substantial liability and civil monetary penalties, exclusion of our products from reimbursement under government programs, criminal fines or imprisonment or the entry into a Corporate Integrity Agreement, Deferred Prosecution Agreement, or similar arrangement.

In addition, federal legislation now imposes additional requirements. For example, as part of the Patient Protection and Affordable Care Act, a federal physician payment disclosure provision based on the Physician Payments Sunshine Act was enacted, which requires pharmaceutical manufacturers to report certain gifts and payments to physicians beginning in 2013. These reports will then be placed on a public database. Failure to so report could subject companies to significant financial penalties.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including activities conducted by our sales team in the promotion of our licensed or co-promoted products, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.


Risks Relating to Our Common Stock

If we issue additional shares in the future, it will result in the dilution of our existing shareholders.

Our articles of incorporation authorize the issuance of up to (i) 75,000,000 shares of common stock with a par value of $0.01 per share, of which 19,755,595 were issued and outstanding at December 31, 2014, and (ii) 1,000,000 shares of preferred stock, par value $0.01 per share, of which 468 shares of Series A preferred stock, 50 shares of Series B-2 preferred stock and 117 shares of Series C-1 preferred stock were issued and outstanding at December 31, 2014. Our Board of Directors may choose to issue some or all of the remaining authorized shares to acquire one or more products and to fund our overhead and general operating requirements. The issuance of any such shares may reduce the book value per share and may contribute to a reduction in the market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will reduce the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our corporation.

Our stock price could be volatile and our trading volume may fluctuate substantially.

The price of our common stock has been and may in the future continue to be extremely volatile. Many factors could have a significant impact on the future price of our common stock, including:

our inability to raise additional capital to fund our operations, whether through the issuance of equity securities or debt;

our failure to successfully commercialize products we license for commercial sale;

our failure to successfully advance the development of our programs or otherwise implement our business objectives;

changes in our intellectual property portfolio or developments or disputes concerning the proprietary rights of our product candidates;
 
 
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our ability to successfully enter into and maintain manufacturing relationships for our products;

progress or future results of partnered assets;

progress of regulatory approval of our partnered products and compliance with ongoing regulatory requirements;

market acceptance of our products;

technological innovations, new commercial products and clinical activities by us, our partners or our competitors;

changes in government regulations;

issuance of new or changed securities analysts’ reports or recommendations;

general economic conditions and other external factors;

actual or anticipated fluctuations in our quarterly financial and operating results;

the degree of trading liquidity in our common stock; and

our ability to regain compliance with the minimum bid price (and our ability to maintain compliance with other minimum standards) required for remaining listed on the NASDAQ Capital Market.

A significant number of shares of our common stock are issuable pursuant to outstanding shares of convertible preferred stock, options and warrants, and we expect to sell additional shares of our common stock in the future. Sales of these shares will dilute the interests of other security holders and may depress the price of our common stock.

As of December 31, 2014, we had 19,755,595 shares of common stock outstanding. As of December 31, 2014, there were 37,440 shares of common stock issuable upon the conversion of outstanding shares of Series A preferred stock, 20,408 shares of common stock issuable upon the conversion of outstanding shares of Series B-2 preferred stock, 105,405 shares of common stock issuable upon the conversion of outstanding shares of Series C-1 preferred stock, 17,505,025 shares of common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $2.52 per share, 1,142,101 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $3.96 per share, 445,577 shares of common stock reserved for future grants and awards under our equity incentive plans and 178,330 shares of common stock reserved for issuance to former Oncogenerix, Inc. stockholders, based upon our achievement of certain revenue or market capitalization milestones during the five year period ending January 2017. The conversion price of the Series B-2 preferred stock is subject to full-ratchet antidilution protection if we sell any common stock at a price lower than the then-conversion price of the Series B-2 (currently, $2.45 per share).  Similarly, the conversion price of the Series C-1 preferred stock is subject to full-ratchet anti-dilution protection if we sell any common stock at a price lower than the then-conversion price of the Series C-1 (currently, $1.11 per share).

In addition to the foregoing, we may issue additional common stock, or other securities convertible into common stock, from time to time to finance our operations. We may also issue additional shares in connection with additional stock options or restricted stock granted to our employees, officers, directors and consultants under our equity compensation plans. The issuance of the shares of common stock underlying these instruments, or perception that issuance may occur, will have a dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock.

If we fail to satisfy applicable listing standards, including maintenance of at least $2.5 million of stockholders’ equity and regaining compliance with the $1.00 minimum bid price requirement, our common stock may be delisted from The NASDAQ Capital Market.

As previously disclosed, on November 17, 2014, we received a notification letter from the Listing Qualifications Department of The NASDAQ Stock Market indicating that we were not in compliance with the $1.00 minimum bid requirement. In accordance with Marketplace Rule 5550(a)(2), we have 180 calendar days, or until May 18, 2015, to regain compliance with the minimum $1.00 price per share requirement. To regain compliance, any time before May 18, 2015, the bid price of our common stock must close at or above $1.00 per share for a minimum of 10 consecutive business days.  On May 18, 2015, if we meet The NASDAQ Capital Market initial listing criteria set forth in NASDAQ Listing Rule 5505, except for the minimum bid price requirement, we may be provided with an additional 180 calendar day compliance period to demonstrate compliance.  If we are not eligible for an additional compliance period at that time, NASDAQ will provide us with written notification that our common stock will be delisted.  Upon such notice, we may appeal the NASDAQ Staff’s determination to a NASDAQ Listing Qualifications Panel pursuant to the procedures set forth in the applicable NASDAQ Marketplace Rules. There can be no assurance that, if we appeal any such determination of the NASDAQ Staff, such appeal would be successful.
 
 
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There can be no assurances that we will regain compliance with NASDAQ’s minimum bid requirement or, even if we do regain compliance, that we will be able to maintain our NASDAQ listing. If our common stock were delisted from NASDAQ, among other things, it would likely lead to a number of negative implications, including an adverse effect on the price of our common stock, reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing. In the event of a de-listing, we would take actions to restore our compliance with NASDAQ’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance with NASDAQ’s listing requirements.

We have never paid cash dividends and do not intend to do so.

We have never declared or paid cash dividends on our common stock. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations and capital requirements, as well as other factors deemed relevant by our board of directors.

 
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Item 1B. Unresolved Staff Comments.
 
None.
 
Item 2. Properties.
 
Our principal property is our corporate headquarters located at 8601 Six Forks Road, Suite 160, Raleigh, North Carolina.  We lease this office space (7,520 square feet) under a lease agreement with Highwoods DLF Forum, LLC that has a term that runs through March 31, 2018.
 
Item 3. Legal Proceedings.
 
In November, 2012, a suit was filed in the United States District Court for the 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, an obligation which survives the expiration or termination of the Exclusive Marketing Agreement.  As a result, Innocutis has assumed our defense. The defendants filed a motion to dismiss the complaint on February 1, 2013. On June 26, 2014, counsel for the defendants notified the Court that the United States Patent and Trademark Office had completed a reexamination of two patents which underlie the suit and also filed a Motion to Dismiss. On August 25, 2014, plaintiff filed an amended complaint asserting that defendants infringed on certain patents relating to the sale of Bionect.  On September 25, 2014, defendants filed an answer and asserted various affirmative defenses and counterclaims.  A scheduling conference which was previously scheduled to be held in December has been moved to March 3, 2015. No assurance can be given regarding the outcome of this litigation.  However, we believe the plaintiff’s claims are substantially without merit and the resolution of this matter will not have a material adverse effect on our financial position or results of operations.
 
In July, 2014, a suit was filed in the United States District Court for the District of Columbia naming us as a defendant. The plaintiff in the suit is GlycoBioSciences Inc.  Also named as a defendant is Helsinn Healthcare SA (“Helsinn”).  The plaintiff alleges that defendants’ distribution and sale of Gelclair infringes on one 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 Helsinn. Helsinn is required to indemnify us in connection with this lawsuit.  As a result, Helsinn has assumed our defense.  On October 10, 2014 defendants filed an Answer and Counterclaims and asserted various affirmative defenses and the plaintiff filed answers thereto on October 29, 2014.  An initial Scheduling Conference has been set for March 11, 2015.  No assurance can be given regarding the outcome of this litigation.  However, we believe that the plaintiff’s claims are substantially without merit and the resolution of this matter will not have a material adverse effect on our financial position or results of operations.
 

 
Item 4. Mine Safety Disclosures.
 
Not applicable.
 
 
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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
The following table sets forth for the periods indicated the range of high and low reported sales price per share of our common stock as reported on The NASDAQ Capital Market.
 

 
   
High ($)
   
Low ($)
 
2014
           
First Quarter
  4.40     2.50  
Second Quarter
  3.01     1.02  
Third Quarter
  1.64     1.02  
Fourth Quarter
  1.09     0.74  
             
2013
           
First Quarter
  6.00     3.80  
Second Quarter
  5.20     2.60  
Third Quarter
  3.60     2.35  
Fourth Quarter
  3.75     2.25  
 
Stockholders

Our transfer Agent is American Stock Transfer and Trust Company. On February 26, 2015, the last reported sale price of our common stock on The NASDAQ Capital Market was $0.95 per share.  On February 26, 2015, there were approximately 133 holders of record of our common stock.
 
Dividend Policy
 
We have not declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Our board of directors will determine future dividends, if any.
 
Item 6. Selected Financial Data.
 
Not applicable.
 
Item 7. 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 Annual Report on Form 10-K.  Some of the information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report includes forward-looking statements based on our current management’s expectations.  There can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, among others, our limited operating history, unpredictability of future operating results, competitive pressures and the other potential risks and uncertainties discussed in the Risk Factors section of this Form 10-K.
 
 
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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 FDA-approved proprietary product license, SoltamoxÒ (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 GelclairÒ, a unique oral gel whose key ingredients are polyvinylpyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid) for the management and relief of pain due to oral mucositis.
 
On October 25, 2013, we entered into an agreement with Alamo Pharma Services (“Alamo”) pursuant to which Alamo 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) and Gelclair, also promotes two Mission products: Ferralet® 90, 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.  Although the expansion of the sales force to 20 sales representatives, has significantly increased our commercial costs, net of the Mission support payments to Alamo, we believe our investment in this sales force will help us increase our revenues and our product portfolio’s market acceptance.
 
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 and, in 2014 received orphan drug designation from the FDA for the treatment of painful CCIPN that is refractory to conventional analgesics, as well as for the treatment of multiple myeloma.
 
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 certain 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. Gelclair and Soltamox are now available in over 95% of local retail pharmacies nationwide, and the retail patient cost savings program 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 previously 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 sales 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:
 
 
·
Gelclair, an FDA-cleared product indicated for the management and relief of pain due to oral mucositis;
 
 
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·
Soltamox, an FDA-approved oral liquid solution of tamoxifen citrate; and
 
·
Two Mission products:  Ferralet 90 (for anemia), and Aquoral (for cancer related dry month).
 
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; and a marketing agreement to co-promote two Mission products:  Ferralet 90 and Aquoral.  We are working to expand our portfolio to include additional products through licenses and other collaborative arrangements.
 
KRN5500 Clinical Stage Asset
 
KRN5500 is a novel, non-narcotic/non-opioid intravenous product being investigated for the treatment of painful CCIPN that is refractory to conventional analgesics. We have successfully completed a Phase 2a proof of concept study of KRN5500 in patients with advanced cancer and analgesia-resistant neuropathic pain where it showed clinically-significant and 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 made changes in order to improve and simplify 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 determining whether any further internal development of KRN5500 would be beneficial to our partnering efforts.
 
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. On June 16, 2014 the FDA granted Orphan Drug Designation to KRN5500 for the treatment of multiple myeloma.  Upon approval by the FDA, orphan drug designation provides extended market exclusivity, tax benefits, and the waiver of certain fees associated with the FDA approval process.
 
Critical Accounting Policies
 
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical trial expenses, stock-based compensation and asset impairment and significant judgments and estimates. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this report, we believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results.
 
Revenue Recognition
 
We recognize 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 they 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.
 
 
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Revenue from Gelclair sales is generally 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 we do 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 us to other third party purchasers.  As we gain greater experience with actual returns related to our 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. We recognize chargebacks in the same period the related revenue is recognized.
 
Inventories
 
Inventories at December 31, 2014 and December 31, 2013 were $265,280 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 inventories are 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.
 
Income Taxes
 
We use 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 December 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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Our 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 occurred, 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, formulation and active pharmaceutical ingredient, “API”, manufacturing costs, process development, research costs, patent costs, pharmacovigilence costs, PDUFA fees, regulatory costs and other consulting and professional services
 
 
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Valuation of Goodwill and Acquired Intangible Assets
 
We have recorded goodwill and acquired intangible assets related to our 2012 acquisition of Oncogenerix and Soltamox.  We have also recorded product license fees related to the Gelcair license. When identifiable intangible assets are acquired, we determine the fair values of the assets as of the acquisition date.
 
The estimated residual value of our intangible assets with definite useful lives are amortized 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 an impairment test as of September 30, 2014 and determined the carrying value of goodwill was not impaired.
 
When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we test for any impairment based on a projected undiscounted cash flow method. Projected future operating results and cash flows of the asset or asset group are used to establish the fair value used in evaluating the carrying value of long-lived and intangible assets. We estimate the expected future cash flows of the long-lived assets using current and long-term financial forecasts.
 
Due to delays in execution of the original marketing plan, we determined that events and circumstances indicated that the Soltamox products rights intangible might be impaired as of September 30, 2014.  The sum of the expected future net undiscounted cash flows to be generated from use of the product rights, over the remaining useful life of the asset (the same period over which the intangible is being amortized, or 3.8 years), was less than the carrying amount of the asset as of September 30, 2014.  However, utilizing a probability weighted present value analysis, we determined that the fair value of the Soltamox product rights exceeded the carrying amount of the asset as of September 30, 2014.  Actual results for the fourth quarter 2014 were consistent with the estimates used for the September 30, 2014 analysis.  Accordingly, we have not recognized an impairment to the Soltamox product rights for the year ended December 31, 2014.
 
Significant management judgment is required in the forecasting of future operating results that are used in our impairment evaluations. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to determine the fair value of these assets, we could incur future impairment charges. The impairment loss that could be recognized is the amount by which the carrying amount exceeds the fair value.

 
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.
 
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 9 - Share Based Compensation, included in the consolidated financial statements appearing elsewhere in this report, for additional information regarding our adoption of ASC 718.
 
 
29

 
 
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
 
Net revenues and cost of product sales increased by $1,467,185 and $224,092 from $419,322 and $218,928 for the year ended December 31, 2013 to $1,886,507 and $443,020 for the year ended December 31, 2014, respectively due increases sales and related costs of sales associated with the launch of the new Alamo sales force in the first quarter of 2014.
 
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 by $1,385,660 from $3,839,672 for the year ended December 31, 2013 to $5,225,332 for the year ended December 31, 2014 as a result of the increase in sales force costs related to the sales force expansion with Alamo in the first quarter of 2014, offset by a reduction in marketing program costs.
 
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 by $1,477,414 from $1,953,407 for the year ended December 31, 2013 to $475,993 for the year ended December 31, 2014, primarily due to a reduction in PDUFA fees resulting from a waiver granted by the FDA in 2014.  The reduction in the PDUFA fees included a refund check of approximately $619,000 which was received in January 2015.  The decrease in research and development costs was also a result of a decrease in formulation and API manufacturing costs associated with the KRN5500 program.  The reformulation and manufacturing was completed during 2013 and there have been no related costs to date in 2014.
 
General and administrative expenses consist primarily of salaries and benefits, professional fees 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 by $238,718 from $4,266,006 for the year ended December 31, 2013 to $4,504,724 for the year ended December 31, 2014, primarily as a result of increased personnel costs.
 
Depreciation and amortization expense increased by $6,932 from $630,652 for the year ended December 31, 2013 to $637,584 for the year ended December 31, 2014, 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 by $12,565 from $150,103 for the year ended December 31, 2013 to $162,668 for the year ended December 31, 2014, primarily as a result of approximately $147,000 in net increased license revenue recognized in other income during the first quarter of 2014 related to the sublicense of DB959 to T3D Therapeutics, Inc., partially offset by the 2013 gain of approximately $72,000 on the sale of the remainder of its marketable securities and the 2013 proceeds from an insurance policy of approximately $37,000.  Consolidated net loss decreased by $1,130,346 from $10,367,824 for the year ended December 31, 2013 to $9,237,478 for the year ended December 31, 2014, primarily due to the factors discussed above.
 
 
30

 
 
Liquidity and Capital Resources
 
Overview
 
From inception through December 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 $70,122,146 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.
 
Working Capital
 
   
December 31,
   
December 31,
 
   
2014
   
2013
 
Current assets
  $ 13,773,766     $ 3,888,637  
Current liabilities
    3,745,278       1,675,061  
Working capital
  $ 10,028,488     $ 2,213,576  

 
At December 31, 2014, our principal sources of liquidity were our cash and cash equivalents which totaled $12,026,612. As of December 31, 2014, we had working capital of $10,028,488.  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.  From December 31, 2013 to December 31, 2014, our working capital increased by $7,814,912 due to cash provided by financing activities of approximately $16.6 million, partially offset by cash used in operating activities of approximately $8.0 million.
 
We have incurred significant net losses and have had negative cash flows from operations during each period from inception through December 31, 2014 and have an accumulated deficit of $65,993,722 at December 31, 2014. Management expects operating losses and negative cash flows to continue through 2015 and the foreseeable future.
 
Cash Flows
 
       
   
2014
   
2013
 
Cash used in operating activities
  $ (7,986,814 )   $ (9,129,307 )
                 
Cash (used in) provided by investing activities
    (2,135 )     81,787  
                 
Cash provided by financing activities
    16,590,018       5,976,606  
                 
Net increase (decrease) increase in cash and
cash equivalents
  $ 8,601,069     $ (3,070,914 )
 
 
Our cash used in operating activities for the year ended December 31, 2014 compared to our cash used in operating activities for the year ended December 31, 2013 decreased by $1,142,493 primarily due to the decrease in consolidated net loss of $1,130,346, which was driven primarily by the increase in sales, as explained above.
 
Our net cash used in investing activities during the year ended December 31, 2014 was $2,135 which consisted of purchases of furniture and fixtures.  Our cash provided by investing activities during the year ended December 31, 2013 compared to our cash used in investing activities for the year ended December 31, 2014 decreased by $83,922 primarily due to a $94,005 decrease in proceeds from marketable securities.
 
Our net cash provided by financing activities for the year ended December 31, 2014 compared to our net cash provided by financing activities for the year ended December 31, 2013 increased by $10,613,412 primarily due to the $11,834,985 increase in net proceeds from issuances of preferred and common stock, partially offset by a $1,221,099 reduction in the amount received from the exercise of warrants.
 
 
31

 
 
Financial Condition
 
We funded our 2014 operations primarily from net proceeds from equity securities issued totaling approximately $16,800,000 in 2014 and from cash receipts from net sales.  We ended 2014 with cash and cash equivalents totaling approximately $12,027,000.   We believe that, based upon our current operating plan, that such currently available funds, together with projected product sales in 2015, will enable us to fund our planned operations and to meet its obligations through the first quarter of 2016.  We will need additional funds to meet our obligations and fund operations beyond that time.
 
As discussed above, we believe we have sufficient working capital to continue our operations through the first quarter of 2016.  We expect to require additional investment capital to pursue our long-term business plan. Our working capital requirements will depend upon numerous factors including the costs we may incur building a portfolio of pharmaceutical products and a sales force to commercialize such products, and our ability to sell or license these technologies to third parties.  In any event, we may require substantial funds in addition to those presently available to meet our business objectives.  To ensure the continued level of development and funding of our operations, we expect to continue to explore various possible financing options that may be available to us, which may include a sale of our securities, the sale of certain of our investments or out-licensing of one or more of our drug programs.  We have no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all.  If we need to raise funds and are unable to secure them, we may not be able to:
 
 
·
continue marketing and sales efforts with respect to Soltamox or begin such efforts for other products;
 
 
·
successfully build a portfolio of additional products for commercialization;
 
 
·
successfully out-license, otherwise monetize or commercialize any of our programs; or
 
 
·
continue operations.
 
Off-Balance Sheet Arrangements
 
We had no off-balance sheet arrangements as of December 31, 2014.
 
Recent Accounting Pronouncements
 
There have been recent accounting pronouncements that have significance, or potential significance, to our consolidated financial statements.
 
Recent Accounting Pronouncements Not Yet Effective
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (“IASB”) to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. We are currently evaluating the requirements of ASU 2014-09 and have not yet determined its impact on our consolidated financial statements.
 
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which defines management’s responsibility to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about the company’s ability to continue as a going concern within one year after the issuance date.  Disclosures are required if conditions give rise to substantial doubt.  This standard is effective for all companies in the first annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not expect this ASU will have a material impact on our consolidated financial statements.
 
 
32

 
 
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
 
Not applicable.
 
 
 
 
 
 
33

 
 
Item 8. Financial Statements and Supplementary Data.
 

 
DARA BioSciences, Inc.
INDEX TO FINANCIAL STATEMENTS
 
 
   
 
Page
Report of Independent Registered Public Accounting Firm
35
   
Consolidated Balance Sheets at December 31, 2014 and 2013
36
   
Consolidated Statements of Operations and Comprehensive Loss for the Years
Ended December 31, 2014 and 2013
37
   
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014 and
2013
38
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and
2013
40
   
Notes to Consolidated Financial Statements
41
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
34

 
 
Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders
DARA BioSciences, Inc.

We have audited the accompanying consolidated balance sheets of DARA BioSciences, Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ HORNE LLP

Ridgeland, Mississippi
March 3, 2015
 
 
35

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS

   
December 31,
   
December 31,
 
   
2014
   
2013
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 12,026,612     $ 3,425,543  
Accounts receivable, net
    1,354,880       174,086  
Inventory, net
    265,280       104,089  
Prepaid expenses and other assets, current portion
    126,994       184,919  
Total current assets
    13,773,766       3,888,637  
                 
Furniture, fixtures and equipment, net
    35,597       40,614  
Restricted cash
    12,888       12,882  
Intangible assets, net
    3,109,034       3,224,711  
Goodwill
    821,210       821,210  
Total assets
  $ 17,752,495     $ 7,988,054  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 483,244     $ 619,566  
Accrued liabilities
    1,169,863       785,016  
Accrued compensation
    653,109       124,293  
License milestone liability
    1,231,559        
Deferred revenue
    200,161       142,269  
Capital lease obligation, current portion
    7,342       3,917  
Total current liabilities
    3,745,278       1,675,061  
Deferred lease obligation
    68,869       72,729  
License milestone liability, non-current
          662,215  
Capital lease obligation, net of current portion
    22,217       16,044  
Total liabilities
    3,836,364       2,426,049  
                 
Stockholders’ equity:
               
Preferred stock, $0.01 par value, 1,000,000 shares authorized at December 31, 2014
               
and December 31, 2013.
               
 Series A Preferred stock, 4,800 shares designated,
               
468 shares issued and outstanding at December 31, 2014,
    5       5  
578 shares issued and outstanding at December 31, 2013.
               
Series B2 Preferred stock, 15,000 shares designated,
               
50 shares issued and outstanding at December 31, 2014 and December 31, 2013.
    1       1  
Series B3 Preferred stock, 2,550 shares designated,
               
0 shares issued and outstanding at December 31, 2014, and December 31, 2013.
           
Series B4 Preferred stock, 250 shares designated,
               
0 shares issued and outstanding at December 31, 2014,
               
100 shares issued and outstanding at December 31, 2013.
          1  
Series C1 Preferred stock, 75,000 shares designated,
               
117 shares issued and outanding at December 31, 2014,
               
0 shares issued and outstanding at December 31, 2013,
    1        
Common stock, $0.01 par value, 75,000,000 shares authorized,
               
19,755,595 shares issued and outstanding at December 31, 2014,
               
6,194,713 shares issued and outstanding at December 31, 2013.
    197,556       61,947  
Additional paid-in capital
    79,712,290       63,540,086  
Accumulated deficit
    (65,993,722 )     (56,992,595 )
                 
Total stockholders’equity before noncontrolling interest
    13,916,131       6,609,445  
Noncontrolling interest
          (1,047,440 )
                 
Total stockholders' equity
    13,916,131       5,562,005  
                 
Total liabilities and stockholders’ equity
  $ 17,752,495     $ 7,988,054  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
36

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
The accompanying notes are an integral part of these consolidated financial statements.
 
   
Year Ended December 31,
 
   
2014
   
2013
 
             
Net revenues
  $ 1,886,507     $ 419,322  
                 
Operating expenses:
               
Cost of Sales
    443,020       218,928  
Sales and marketing
    5,225,332       3,839,672  
Research and development
    475,993       1,953,407  
General and administrative
    4,504,724       4,266,006  
Depreciation and amortization of intangibles
    637,584       630,652  
Total operating expenses
    11,286,653       10,908,665  
Loss from operations
    (9,400,146 )     (10,489,343 )
                 
Other income (expense):
               
Gain on sale of marketable securities and nonmonetary assets
          71,712  
Other income, net
    228,375       144,965  
Interest (expense), net
    (65,707 )     (66,574 )
Other income
    162,668       150,103  
                 
Net loss before income taxe expense (benefit)
    (9,237,478 )     (10,339,240 )
Income tax benefit
          (28,584 )
Consolidated net loss
    (9,237,478 )     (10,367,824 )
Loss attributable to noncontrolling interest
    236,351       402,810  
Loss attributable to controlling interest
  $ (9,001,127 )   $ (9,965,014 )
                 
Basic and diluted net loss per common share
               
   attributable to controlling interest
  $ (0.63 )   $ (1.94 )
                 
Shares used in computing basic and diluted net loss per
               
   common share
    14,305,431       5,132,256  
                 
Comprehensive Loss:
               
Consolidated net loss
  $ (9,237,478 )   $ (10,367,824 )
Other Comprehensive income
               
Unrealized gain 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  
Comprehensive Loss
    (9,237,478 )     (10,413,293 )
Comprehensive loss attributable to noncontrolling interest
    236,351       402,810  
Comprehensive loss attributable to controlling interest
  $ (9,001,127 )   $ (10,010,483 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
37

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                           
Stockholders’
   
                         
Accumulated
Equity
   
 
Series A
Series B-2
Series B-3
Series B-4
   
Additional
 
Other
Before
 
Total
 
Convertible
Convertible
Convertible
Convertible
   
Paid-In
Accumulated
Comprehensive
Noncontrolling
Noncontrolling
Stockholders’
 
Preferred Stock
Preferred Stock
Preferred Stock
Preferred Stock
Common Stock
 
Capital
Deficit
 Income
Interest
Interest
Equity
 
   Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
           
                                 
                                 
Balance at December 31,
2012
         828
 $              8
       1,110
 $           11
               –
 $             –
               –
 $             –
           3,789,418
 $            37,894
 $        56,581,804
 $     (47,027,581)
 $                45,469
 $                9,637,605
 $           (644,630)
 $             8,992,975
                                 
Share-based compensation
             –
                –
             –
                –
               –
                –
               –
                –
                  8,000
                      80
                818,704
                         –
                           –
                      818,784
                          –
                   818,784
Issuance of B-3 and B-4  
preferred stock, net of
issuance costs of $284,272
             –
                –
             –
                –
        2,550
              26
           250
                3
                         –
                       –
             1,918,906
                         –
                           –
                   1,918,935
                          –
                1,918,935
Issuance of B-3 and B-4
warrants
             –
                –
             –
                –
               –
                –
               –
                –
                         –
                       –
                596,793
                         –
                           –
                      596,793
                          –
                   596,793
Retirement of common
stock
             –
                –
             –
                –
               –
                –
               –
                –
              (40,000)
                  (400)
                       400
                         –
                           –
                                 –
                          –
                             –
Issuance of common stock,
net of issuance costs of
$380,000
             –
                –
             –
                –
               –
                –
               –
                –
           1,113,353
               11,133
             1,459,348
                         –
                           –
                   1,470,481
                          –
                1,470,481
Issuance of warrants with
common stock
             –
                –
             –
                –
               –
                –
               –
                –
                        -
                      -
                956,231
                         –
                           –
                      956,231
                          –
                   956,231
Issuance of common stock
from exercise of warrants
             –
                –
             –
                –
               –
                –
               –
                –
              292,774
                 2,928
             1,218,171
                         –
                           –
                   1,221,099
                          –
                1,221,099
Conversion of preferred
stock to common stock
       (250)
               (3)
     (1,060)
             (10)
      (2,550)
             (26)
         (150)
               (2)
           1,031,168
               10,312
                (10,271)
                         –
                           –
                                 0
                          –
                              0
Net change in unrealized
gain on investments
available-for-sale, net of
taxes
             –
                –
             –
                –
               –
                –
               –
                –
                         –
                       –
                           –
                         –
                 (45,469)
                       (45,469)
                          –
                   (45,469)
Net loss
             –
                –
             –
                –
               –
                –
               –
                –
                         –
                       –
                           –
          (9,965,014)
                           –
                  (9,965,014)
              (402,810)
            (10,367,824)
                                 
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
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
38

 

DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                         
Stockholders’
   
                         
Equity
   
 
Series A
Series B-2
Series B-4
Series C-1
   
Additional
 
Before
 
Total
 
Convertible
Convertible
Convertible
Convertible
   
Paid-In
Accumulated
Noncontrolling
Noncontrolling
Stockholders’
 
Preferred Stock
Preferred Stock
Preferred Stock
Preferred Stock
Common Stock
 
Capital
Deficit
Interest
Interest
Equity
 
   Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
         
                               
                               
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
             –
                –
             –
                –
               –
                –
                –
                –
                24,000
                    240
                813,939
                         –
                      814,179
                          –
                   814,179
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 Series C-1 preferred
stock, net of issuance costs of
$1.2 million
             –
                –
             –
                –
               –
                –
       12,500
            125
                         –
                       –
             7,366,739
                         –
                   7,366,864
                          –
                7,366,864
Issuance of C-1 warrants
             –
                –
             –
                –
               –
                –
                –
                –
                         –
                       –
             3,926,476
                         –
                   3,926,476
                          –
                3,926,476
Issuance of common stock and
warrants to MGH
             –
                –
             –
                –
               –
                –
                –
                –
              165,000
                 1,650
                372,872
                         –
                      374,522
–  
                   374,522
Increase in Dara's controlling
interest
             –
                –
             –
                –
               –
                –
                –
                –
                         –
                       –
           (1,658,313)
                         –
                  (1,658,313)
             1,283,791
                 (374,522)
Conversion of preferred stock to common stock
       (110)
                –
             –
                –
         (100)
               (1)
      (12,383)
           (124)
         11,205,381
             112,054
              (111,929)
                         –
                                 –
                          –
                             –
Net loss
             –
                –
             –
                –
               –
                –
                –
                –
                         –
                       –
                           –
          (9,001,127)
                  (9,001,127)
              (236,351)
              (9,237,478)
                       
 
     
Balance at December 31, 2014
         468
 $              5
            50
 $             1
               –
 $            -
            117
 $             1
         19,755,595
 $          197,556
 $        79,712,290
 $     (65,993,722)
 $              13,916,131
 $                      -
 $           13,916,131
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
39

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year Ended December 31,
 
   
2014
   
2013
 
Operating activities
           
Consolidated net loss
  $ (9,237,478 )   $ (10,367,824 )
Adjustments to reconcile net loss to net cash used in
               
operating activities:
               
Depreciation and amortization
    637,584       630,652  
Deferred income tax expense (benefit)
          28,584  
Accretion of debt discount and other
    69,344       65,844  
Share-based compensation
    814,179       818,784  
Gain on sale of investments
          (71,712 )
Deferred lease obligation
    (3,860 )     31,864  
Changes in operating assets and liabilities, net of effect of business acquisition:
               
Accounts receivable
    (1,180,794 )     (704 )
Inventory
    (161,191 )     21,186  
Prepaid expenses and other assets
    240,169       189,359  
Accounts payable and accrued liabilities
    835,233       (475,340 )
Net cash used in operating activities
    (7,986,814 )     (9,129,307 )
                 
Investing activities
               
Purchases of furniture, fixtures and equipment
    (2,135 )     (12,218 )
Proceeds from sale of investments
          94,005  
Net cash (used in) provided by investing activities
    (2,135 )     81,787  
                 
Financing activities
               
Repayments of capital lease obligation
    (5,157 )     (7,172 )
Repayments on other financing
    (182,244 )     (179,754 )
Proceeds from exercise of options and warrants
          1,221,099  
Net proceeds from issuance of preferred stock and common stock
    16,777,425       4,942,440  
Change in restricted cash
    (6 )     (7 )
Net cash provided by financing activities
    16,590,018       5,976,606  
                 
Net increase (decrease) in cash and cash equivalents
    8,601,069       (3,070,914 )
                 
Cash and cash equivalents at beginning of period
    3,425,543       6,496,457  
Cash and cash equivalents at end of period
  $ 12,026,612     $ 3,425,543  
                 
Supplemental disclosure of non-cash financing activity
               
Shares and warrants issued to third party for services
  $ 30,939     $ -  
Equipment purchased through financing
    14,755        
License milestone liability
    500,000       125,000  
Shares and warrants issued for consideration of remaining interest in Dara Therapeutics
    374,522        
 
The accompanying notes are an integral part of these consolidated financial statements.
  
 
40

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  Basis of Presentation
 
The Company
 
DARA BioSciences, Inc. (the “Company”), headquartered in Raleigh, North Carolina is a specialty pharmaceutical company primarily focused on the commercialization of oncology treatment and oncology supportive care pharmaceutical products.  Through its acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, the Company acquired exclusive U.S. marketing rights to its first commercial, FDA-approved proprietary product 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 7, 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 (PVP) and sodium hyaluronate (hyaluronic acid) for the management and relief of pain due to oral mucositis in the United States.
 
On October 25, 2013, the Company entered into an agreement with Alamo Pharma Services (“Alamo”) pursuant to which Alamo provides the Company with a dedicated national sales team of 20 sales representatives to promote its 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) and Gelclair, is also promoting two Mission products: Ferralet® 90, 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.
 
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’s commercial costs, net of Mission support payments to Alamo, are significantly higher on an annualized basis.
 
The Company has a clinical development asset, KRN5500, which is a Phase 2 product candidate targeted for treating 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 CCIPN that is refractory to conventional analgesics. On June 16, 2014 the FDA granted Orphan Drug Designation to KRN5500 for treatment of multiple myeloma.  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 for those products that demonstrate the potential to address unmet medical needs.  Upon receipt of FDA approval, 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 support further development of KRN5500 and is determining whether further internal development of KRN5500 could be beneficial to the Company’s partnering efforts.

The Company has been in communication with the FDA with regard to the remainder of the clinical and technical development program for KRN5500 and hopes to receive feedback from them in the first quarter of 2015.  The Company believes that this feedback will help advance its conversations with potential partners.

On February 10, 2014, the Company effected a one-for-five reverse split of its outstanding common stock pursuant to an amendment to the Company’s certificate of incorporation.  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 for the years ended December 31, 2014 and 2013.  Unless stated otherwise, all share data in this Annual Report on Form 10-K has been adjusted, as appropriate, to reflect the reverse split.
 
 
41

 
 
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.   The Company launched Soltamox in the U.S. in late 2012 and subsequently launched its second product, Gelclair in the second quarter of 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. The Company completed financings in February 2014 and June 2014, raising approximately $5.5 million and $11.3 million, respectfully in net proceeds through the issuance of common stock, preferred stock and warrants to purchase common stock.  See Note 8.  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 first quarter of 2016.
 
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.
 
2.  Significant Accounting Policies
 
Principles of Consolidation
 
The 2013 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 as of December 31, 2013 was owned 75% by the Company).
 
During 2014, the Company merged Dara Pharmaceuticals, Inc. into DARA BioSciences, Inc. and dissolved Oncogenerix, Inc.  The Company also acquired back the remaining 25% minority interest in DARA Therapeutics.  See Note 6.  Accordingly, the 2014 consolidated financial statements include the accounts of DARA BioSciences, Inc. and its wholly-owned subsidiary, DARA Therapeutics, Inc.  The Company has control of all subsidiaries, and as such, they are all consolidated in the presentation of the consolidated financial statements. All significant intercompany transactions have been eliminated in the consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from those estimates.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their fair value.
 
Investments
 
The Company accounts for its investment in marketable securities in accordance with FASB ASC 320, Investments – Debt and Equity Securities. See Note 3 for further information. This statement requires certain securities to be classified into three categories: 
 
 
42

 
 
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 investments 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 December 31, 2014 and 2013, the Company had bank balances of $11,811,816 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, Lindencare, Cardinal Health, McKesson Corporation, and Amerisource Bergen Corporation represented 99.9% of our gross trade accounts receivable as of December 31, 2014 and our top four customers, OncoMed, Cardinal Health, McKesson Corporation, and Amerisource Bergen Corporation represented 90% of our gross trade accounts receivable as of December 31, 2013.
 
Accounts Receivable
 
Accounts receivable at December 31, 2014 includes trade accounts receivable and a receivable from the FDA of approximately $619,000 to be refunded to the Company due to a reduction in PDUFA fees resulting from a waiver granted by the FDA in 2014.
 
Inventories
 
Inventories at December 31, 2014 and December 31, 2013 were $265,280 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 inventories are 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.
 
 
43

 
 
Furniture, Fixtures and Equipment, net
 
Furniture, fixtures and equipment, net are recorded at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method.
 
Sales and Marketing Costs
 
Sales and marketing costs consist of salaries, commissions, and benefits to sales and marketing personnel, marketing programs, certain promotional allowances to customers, advertising, distribution and shipping costs.
 
Research and Development Costs
 
The Company expenses 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.
 
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 December 31, 2014, the Company had an aggregate of $3.1 million in capitalized product rights, which it expects to amortize over remaining periods of approximately 3.5 to 7.7 years. As of December 31, 2013 the Company had an aggregate of $3.2 million in capitalized product rights (See Note 5).

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 2014 or 2013.

The Company evaluates the recoverability of its intangible assets subject to amortization and other long-lived assets whenever events or changes in circumstances suggest that the carrying value of the asset or group of assets is not recoverable. The Company measures the recoverability of assets by comparing the carrying amount to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment charge equals the amount by which the carrying amount of the assets exceeds the fair value. Any write-downs are recorded as permanent reductions in the carrying amount of the assets.
 
Due to delays in execution of the original marketing plan, management determined that events and circumstances indicated that the Soltamox product rights intangible might be impaired as of September 30, 2014.   Management determined that the sum of the future net undiscounted cash flows expected to be generated from use of the product rights, over the remaining useful life of the asset (the same period over which the intangible is being amortized, or 3.5 years) was less than the carrying amount of the asset as of September 30, 2014.  However, utilizing a probability weighted present value analysis, management determined that the fair value of the Soltamox product rights exceeded the carrying amount of the asset as of September 30, , 2014.  Actual results for the fourth quarter 2014 were consistent with the estimates used for September 30, 2014 analysis. Accordingly, no impairment to the Soltamox product rights was recognized for the year ended December 31, 2014.

 
 
44

 
 
Significant management judgment is required in the forecasting of future operating results that are used in the Company’s impairment evaluations. The estimates that management has used are consistent with the plans and estimates that are used to manage the business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to determine the fair value of these assets, the Company could incur future impairment charges.

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 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 during specified periods prior to and following product expiration. The Company does not believe it has sufficient experience with the Soltamox product 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 product that are not recognized as revenue are treated as deferred revenue until evidence exists to confirm that pull through sales to hospitals or other end-user customers have occurred.   Revenue is recognized from products sales directly to hospitals, clinics, and pharmacies when the merchandise is shipped.  Revenue from Gelclair sales is recognized when the merchandise is shipped to both wholesalers and direct sales to hospitals, clinics, and pharmacies 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.
 
 
45

 
 
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 9 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 stockholders’ 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 December 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.
 
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 years ended December 31, 2014 and 2013 as their effect is anti-dilutive. For the years ended December 31, 2014 and 2013 there were no in-the-money common stock equivalents.
 
   
Year ended December 31,
 
   
2014
   
2013
 
Net loss attributable to controlling interest
  $ (9,001,127 )   $ (9,965,014 )
                 
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
    14,305,431       5,132,256  
                 
Basic and diluted net loss per common share
attributable to controlling interest
  $ (0.63 )   $ (1.94 )

 
46

 

Recent Accounting Pronouncements
 
There have been no recent accounting pronouncements that have significance, or potential significance, to our consolidated financial statements.
 
Recent Accounting Pronouncements Not Yet Effective
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (“IASB”) to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company's consolidated financial statements.
 
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which defines management’s responsibility to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about the company’s ability to continue as a going concern within one year after the issuance date.  Disclosures are required if conditions give rise to substantial doubt.  This standard is effective for all companies in the first annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company does not expect this ASU will have a material impact on its consolidated financial statements.
 
3.  Investments
 
MRI Interventions, Inc.
 
The Company previously held marketable equity securities in MRI Interventions, Inc. (“MRI”), (OTBB: MRIC), formerly SurgiVision, Inc.  MRI became a publicly traded company on May 18, 2012.
 
During the year ended December 31, 2013, the Company sold its remaining investment in MRI and recognized a gain of $71,712 on the sale of these shares.
 
 
4.  Furniture, Fixtures and Equipment, net
 
Furniture fixtures and equipment consisted of the following at December 31, 2014 and 2013:
 
   
2014
   
2013
 
Furniture and fixtures
  $ 87,009     $ 87,009  
Equipment
    100,871       101,402  
Computer software
    15,659       15,659  
Leasehold improvements
    11,634       11,634  
Total
    215,173       215,704  
Less accumulated depreciation
    (179,576 )     (175,090 )
Furniture, fixtures, and equipment
  $ 35,597     $ 40,614  
 
The Company did not recognize a gain or loss from disposals of fixed assets in 2014 or 2013.
 
 
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Depreciation expense, including depreciation related to assets held under capital leases, was $21,907 and $21,794 for the years ended December 31, 2014 and 2013, respectively.
 
5.  Intangible Assets
 
The Company holds an exclusive license for the U.S. marketing rights to Soltamox from Rosemont Pharmaceuticals, Ltd., a U.K. based oral liquids specialty pharmaceutical company.  The Company acquired this license on January 17, 2012 in connection with its acquisition of Oncogenerix.
 
On September 7, 2012, the Company acquired an exclusive license with Helsinn, to distribute, promote, market and sell Gelclair, a unique oral gel whose key ingredients are polyvinylpyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid) for the management and relief of pain due to all approved indications in the United States and the right to subcontract certain of those licensed rights to subcontractors. Gelclair is an FDA-cleared product indicated for the management and relief of pain due to oral mucositis.  The Company has determined there is a strong likelihood that certain milestones under its license agreements will be reached and that the additional consideration will be paid when due.  This liability was recorded in the Company’s financial statements at the initial discounted value of approximately $703,000. The discounted value of the additional consideration has been recorded by the Company as a non-current asset with a portion recorded as a current liability and the balance recorded as a long-term liability on its December, 2012 balance sheet.  The liability was discounted at the Company's estimated long-term borrowing rate.  During the years ended December 31, 2014 and 2013, the Company recorded an additional current liability of $500,000 and $125,000, respectively related to certain sales milestones due under its license agreement.  The Company is amortizing these prepaid license fees over the estimated useful life of one hundred twenty months on a straight line basis, beginning with September, 2012.
 
Gross cost and accumulated amortization of intangible assets at December 31, 2014 totaled $4,872,034 and $1,763,000, respectively.  Gross cost and accumulated amortization of intangible assets at December 31, 2013 totaled $4,372,034 and $1,147,323, respectively. Amortization of these intangible assets is expected to be approximately $681,000 each year for the next three years, approximately $428,000 in the fourth year, $174,000 in the fifth year and approximately $465,000 in the aggregate thereafter.
 
6. Non-controlling Interest
 
On May 4, 2004, DARA Therapeutics, Inc., a wholly owned subsidiary of the Company that was formerly known as DARA Pharmaceuticals, Inc. (“DARA Therapeutics”) issued a promissory note (the 2004 Note) to The General Hospital Corporation d/b/a Massachusetts General Hospital (“MGH”) in consideration for MGH’s entrance into that certain License Agreement (the “MGH License Agreement”) dated as of May 3, 2004 by and between MGH and DARA Therapeutics.  Pursuant to the MGH License Agreement, DARA Therapeutics licensed certain patents and technological information related to the therapeutic application of KRN5500, a compound that the Company and DARA Therapeutics hoped to develop for the treatment of neuropathic pain. The principal amount of the 2004 Note was $1,000,000 payable through issuance of $1,000,000 in common stock of DARA Therapeutics  (“Dara Therapeutics”) or through cash payments of $500,000 and $1,000,000 at May 3, 2006 and May 3, 2007, respectively. The original 2004 Note had no stated interest rate.
 
On March 1, 2007, DARA Therapeutics settled the 2004 note through the issuance of 333,334 shares of common stock of DARA Therapeutics representing 25% of the then outstanding stock of DARA Therapeutics. The Company recorded the issuance of DARA Therapeutics shares as a non-controlling interest in the subsidiary in the amount of $1,441,948. Net loss attributable to the third party’s non-controlling interest was $236,351 and $402,810 for the years ended December 31, 2014 and 2013, respectively.
 
On December 11, 2014, the Company, DARA Therapeutics and MGH entered into an Exchange and Amendment Agreement (the “Exchange and Amendment Agreement”).  Pursuant to the Exchange and Amendment Agreement, (i) MGH exchanged its 25% equity interest in DARA Therapeutics for 165,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 300,000 shares of the Company’s common stock, (ii) the parties effected certain amendments to the MGH License Agreement and (iii) MGH released the Company, DARA Therapeutics and certain related parties from certain claims arising the License Agreement and MGH’s previous equity interest in DARA Therapeutics.
 
125,000 of the warrants issued to MGH vest upon the completion of the final study report of a clinical trial in which the Company’s KRN5500 compound is demonstrated to meet certain pre-specified endpoints.  The remaining 175,000 warrants issued to MGH  vest upon the U.S. Food and Drug Administration’s approval of the use of KRN5500 for the parenteral treatment of painful, chronic, chemotherapy induced peripheral neuropathy that is refractory to conventional analgesics.
 
 
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As of December 11, 2014, immediately prior to giving effect to the Exchange and Amendment Agreement, the balance of the non-controlling interest in the subsidiary had been reduced to $1,283,791.  In accordance with applicable accounting guidance, the Company recorded the change in its ownership interest in DARA Therapeutics as an equity transaction with no gain or loss recognized.  Accordingly, the fair value of the consideration given to MGH was recorded as equity, the carrying value of the non-controlling interest was reduced to zero and the offset was a debit to additional paid-in-capital.  See Note 8.
 
 
7.  Commitments and Contingencies
 
Operating leases
 
On November 30, 2007, the Company entered into a lease agreement for 7,520 square feet of office space at 8601 Six Forks Road, Raleigh, North Carolina, known as Forum I. The lease term began on April 1, 2008, when the Company relocated its corporate headquarters to the premises, and was to expire on March 31, 2014 with the option to terminate earlier for cause or to extend.  Effective April 1, 2012 the Company amended the lease to extend the expiration date through March 31, 2018. DARA is recording expenses related to the lease ratably over the term of the lease and as a result has recorded a liability at December 31, 2014 and 2013 for the deferred lease obligation of $68,869 and $72,729, respectively.
 
In connection with this lease, the Company issued a letter of credit to the landlord in the amount of $77,080 on December 11, 2007. The letter of credit is renewable annually for the term of the lease with the landlord and is collateralized by cash held in an interest-bearing time deposit at a bank. The security deposit balance, shown as restricted cash on the balance sheet, has been reduced to $12,888 at December 31, 2014 and $12,882 at December 31, 2013. Total rent expense was $156,322 and $155,777 for the years ended December 31, 2014 and 2013, respectively.
 
DARA also has in place various operating leases related to office equipment.
 
At December 31, 2014, future minimum commitments under leases with non-cancelable terms of more than one year are as follows:
 
Year:
 
Operating
Leases
 
2015
  $ 173,391  
2016
    177,058  
2017
    181,476  
2018
    45,646  
Total
  $ 577,571  
 
 
Capital Leases 
 
During 2014, the Company entered into a capital lease agreement of $14,755 for additional office equipment.  During 2012, the Company entered into a capital lease agreement of $36,751 for additional office equipment. The cost of capital lease assets is included under property and equipment in the balance sheet at December 31, 2014 and 2013, respectively. Accumulated depreciation of the leased equipment was $48,703 and $31,124 at December 31, 2014 and 2013, respectively.  
 
The future minimum lease payments required under capital leases and the present values of the net minimum lease payments as of December 31, 2014 are as follows:
 
 
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Year:
 
Capital
Leases
 
2015
  $ 10,904  
2016
    10,904  
2017
    9,679  
2018
    3,554  
2019
    1,777  
Total
    36,818  
Less amount representing interest and maintenance
    (7,259 )
Present value of minimum lease payment
  $ 29,559  

 
Legal Proceedings
 
From time to time, the Company is exposed to various claims, threats, and legal actions in the ordinary course of business. In November, 2012, a suit was filed in the United States District Court District of Columbia naming the Company as a defendant. The plaintiff in the suit is GlycoBioSciences, Inc. Also named as defendant is 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, an obligation which survives the expiration or termination of the Exclusive Marketing Agreement.  As a result, Innocutis has assumed the Company’s defense. The defendants filed a motion to dismiss the complaint on February 1, 2013.  On June 26, 2014, counsel for the defendants notified the Court that the United States Patent and Trademark Office had completed a reexamination of two patents which underlie the suit and also filed a Motion to Dismiss. On August 25, 2014, plaintiff filed an amended complaint asserting that defendants infringed on certain patents relating to the sale of Bionect.  On September 25, 2014, defendants filed an answer and asserted various affirmative defenses and counterclaims.  A scheduling conference which was previously scheduled to be held in December has been moved to March 3, 2015.  The Company believes the plaintiff’s 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 the Company’s financial position or results of operations.
 
In July, 2014, a suit was filed in the United States District Court District of Columbia naming the Company as a defendant. The plaintiff in the suit is GlycoBioSciences Inc.  Also named as a defendant is Helsinn Healthcare SA (“Helsinn”).  The plaintiff alleges that defendants’ distribution and sale of Gelclair infringes on one 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 Helsinn, Helsinn is required to indemnify the Company in connection with this lawsuit.   As a result, Helsinn has assumed the Company’s defense.  On October 10, 2014 defendants filed an Answer and Counterclaims and asserted various affirmative defenses and the plaintiff filed answers thereto on October 29, 2014.  An initial Scheduling Conference has been set for March 11, 2015.  The Company believes the plaintiff’s claims 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 the Company’s financial position or results of operations.

Alamo
 
On October 25, 2013, the Company entered into an agreement with Alamo pursuant to which Alamo provides the Company with a dedicated national sales team of 20 sales representatives to promote its commercial products. In addition, the Company signed an agreement, exclusive to the oncology market, with 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) and Gelclair, now also promotes two Mission products: Ferralet 90, and Aquoral.  The agreements with Alamo and Mission expand the Company’s presence in oncology supportive care and the products complement the Company’s portfolio in presenting comprehensive offerings to the oncologist.
 
 The sales force became operational and sales representatives were trained and in their assigned territories by early January 2014.  With the expansion of the sales force to 20 sales representatives, the Company’s commercial costs are significantly higher on an annualized basis.
 
 
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Under the terms of the Alamo agreement, the Company paid Alamo over a six-month period beginning in December 2013 a one-time implementation fee.  The Company recognized the entire fee in sales and marketing expense in 2013.  In addition, each month the Company is required to pay Alamo a monthly fixed fee during the term of the agreement.
 
The initial term of the agreement is three years and then the agreement automatically renews in one-year terms unless either party provides the other party with at least sixty days written notice prior to the end of the term.  Furthermore, either party may terminate at any time by providing three months written notice.
 
The Company recorded $2,133,398 and $331,998, respectively in expenses related to the Alamo agreement during the years ended December 31, 2014 and 2013.
 
8. Stockholders’ Equity
 
Common Stock
 
On February 10, 2014, the Company effected a one-for-five reverse split of its outstanding common stock pursuant to an amendment to the Company’s certificate of incorporation. 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 for the years ended December 31, 2013 and 2014.
 
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 “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 “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 Share Offering.  The closing of the sale of the shares and warrants under the securities 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”), pursuant to which the Company may sell 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 August 2013 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.
 
 
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Preferred Stock
 
On May 30, 2014, the Company entered into a Securities Purchase Agreement (the “May 2014 Purchase Agreement”) with certain investors providing for the purchase of a total of $12,499,920 of units consisting of (1) an aggregate of 12,499.92 shares of Series C-1 Preferred Stock (convertible into a total of 11,261,189 shares of Common Stock); (2) Five-Year Warrants to purchase an aggregate of 5,630,595 shares of Common Stock at an exercise price of $1.67 per share; and (3) Thirteen-Month Warrants to purchase an aggregate of 5,630,595 shares of Common Stock at an exercise price of $1.67 per share.  The closing of the sale of the Series C-1 convertible preferred shares and warrants under the May 2014 Purchase Agreement took place in two closings on June 4, 2014 and June 5, 2014 for net proceeds of approximately $11.3 million, after deducting placement agent fees and other expenses totaling approximately $1,207,000.  As of December 31, 2014, 12,383 shares of Series C-1 preferred stock have been converted into an aggregate 11,155,765 shares of common stock.
 
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 (initially 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.
 
The closing date for the sale of these securities took place on December 31, 2012 for net proceeds of $2,515,728 with the cash being received by the Company in January 2013. Because the proceeds from the offering were not received until January 2013, the transaction has been accounted for in the year ended December 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 has 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 registration was declared effective on April 10, 2013.

In connection with the Series B-3 and B-4 transaction, on December 28, 2012, the Company entered into an Amendment to Series B-2 Securities Purchase Agreement and Warrants with all of the current holders of warrants issued by the Company pursuant to the securities purchase agreement, dated April 6, 2012.  Pursuant to the amendment, the warrant holders agreed to amend the April Purchase Agreement to permit the Company to conduct further financings below $5.00 and the Company agreed to amend the exercise price of the warrants issued to such warrant holders.  In connection with the amendment, the exercise price of a total of 1,025,000 of $6.25 warrants was reduced to $5.00 and the exercise price of a total of 790,960 of $5.00 warrants was reduced to $4.00. Additionally, pursuant to the certificate of designations for Series B-2 preferred stock, the conversion price of the Company’s then outstanding shares of Series B-2 convertible preferred stock was adjusted from $5.00 to $3.80. The fair value of the warrant modifications was determined to be $238,593 and was recorded as an expense to general and administrative expense as of December 31, 2012.  During the year ended December 31, 2014, investors in the B-4 preferred stock have converted 100 Series B-4 shares into 40,816 shares of common stock.  During the year ended December 31, 2013, investors in the B-3 preferred stock converted all 2,550 shares into 671,048 shares of common stock and investors in the B-4 preferred stock have converted 150 Series B-4 shares into 61,224 shares of common stock.
 
On April 6, 2012, the Company entered into a securities purchase agreement with certain investors in connection with a registered public offering by the Company of 10,250 shares of the Company's Series B-2 convertible preferred stock (which were initially convertible into a total of 2,050,000 shares of common stock) and warrants to purchase up to 1,025,000 shares of the Company's common stock at an exercise price of $5.00 per share and warrants to purchase up to 1,025,000 shares of the Company's common stock at an exercise price of $6.25  per share, for gross proceeds of $10,250,000. The closing of the sale of these securities took place on April 12, 2012 for net proceeds of $9,183,468.

Shares of Series B-2 preferred stock have a liquidation preference equal to $1,000 per share and, subject to certain ownership limitations, are convertible at any time at the option of the holder into shares of the Company's common stock at an initial conversion price of $5.00 per share (adjusted to $2.45). The Series B-2 warrants represent the right to acquire shares of common stock at an exercise price of $5.00 per share and $6.25 per share and will expire on April 12, 2017.  During the year ended December 31, 2014 there were no Series B-2 Preferred share conversions.  During the year ended December 31, 2013, 1,060 Series B-2 Preferred shares were converted into 278,947 shares of common stock, 242,774 of the $4.00 Series B-2 warrants were exercised for proceeds of $971,099 and 50,000 of the $5.00 Series B-2 warrants were exercised for proceeds of $250,000.
 
 
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Management evaluated the terms and conditions of the embedded conversion features based on the guidance of FASB ASC 815 to determine if there was an embedded derivative requiring bifurcation. Management concluded that the embedded conversion feature of the preferred stock was not required to be bifurcated because the conversion feature is clearly and closely related to the host instrument.
 
Management determined that there were no beneficial conversion features for the Series B-2 convertible preferred stock because the effective conversion price was equal to or higher than the fair value at the date of issuance.
 
During the year ended December 31, 2014, investors in the Series A preferred stock converted 110 Series A shares into 8,800 shares of common stock.  During the year ended December 31, 2013, investors in the Series A preferred stock converted 250 Series A shares into 20,000 shares of common stock.
 
 
Warrants
 
In 2014, the Company recognized share-based compensation in accordance with the provisions of ASC 505, Equity, using a fair-value approach related to issuance of 1,449 warrants in the second quarter of 2014 at an exercise price of $3.45 per share to non-employees (i.e. consultants) in exchange for services in the amount of $939.
 
In 2013, the Company recognized share-based compensation in accordance with the provisions of ASC 505, Equity, using a fair-value approach related to issuance of 30,000 warrants in the first quarter of 2013 at an exercise price of $5.10 per share to non-employees (i.e. consultants) and the issuance of 7,246 warrants in the second quarter of 2013 at an exercise price of $3.45 to non-employees in exchange for services in the amount of $115,101 and $18,224, respectively.
 
The Company has a total of 17,505,025 warrants at a weighted-average price of $2.52 to purchase its common stock outstanding as of December 31, 2014, of which 14,505,025 are fully vested and exercisable. These warrants are summarized as follows:
 
Date
 
Price
   
Number of Shares
 
Life
February 26, 2010
  $ 37.60       22,818  
5 year
March 5, 2010
  $ 37.60       665  
5 year
October 26, 2010
  $ 13.95       61,266  
5 year
December 29, 2010
  $ 12.50       180,000  
5 year
December 27, 2011
  $ 6.55       30,000  
10 year
December 27, 2011
  $ 6.55       10,000  
10 year
January 20, 2012
  $ 6.55       123,861  
5 year
February 6, 2012
  $ 7.50       30,000  
5 year
April 16, 2012
  $ 4.00       548,185  
5 year
April 16, 2012
  $ 5.00       975,000  
5 year
December 31, 2012
  $ 5.25       368,422  
5 year
December 31, 2012
  $ 5.25       368,422  
2 year
February 22, 2013
  $ 5.10       30,000  
5 year
June 28, 2013
  $ 3.45       7,246  
5 year
October 22, 2013
  $ 2.80       1,020,000  
5 year
February 18, 2014
  $ 2.64       2,166,501  
5 year
May 19, 2014
  $ 3.45       1,449  
5 year
June 4, 2014
  $ 1.67       5,630,595  
13 months
June 4, 2014
  $ 1.67       5,630,595  
5 year
December 11, 2014
  $ 0.83       175,000  
8 year
December 11, 2014
  $ 0.83       125,000  
8 year
Total number of warrants outstanding at 12/31/14:                17,505,025    
 
 
Common Stock Reserved for Future Issuance
 
The Company has reserved authorized shares of common stock for future issuance at December 31, 2014 as follows:
 
Outstanding stock options
    1,142,101  
Possible future issuance under stock option plan
    445,577  
Oncogenerix contingent consideration
    178,329  
Possible conversion of preferred shares
    163,253  
Outstanding warrants
    17,505,025  
      19,434,285  
 
 
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The table above excludes 4,154,748 new stock options authorized effective January 1, 2015 for issuance under the evergreen provision of the 2008 Plan.
 
9. Share-Based Compensation
 
The Company has two share-based compensation plans, the 2008 Employee, Director, and Consultant Plan (the “2008 Plan”), and the 2003 Amended and Restated Employee, Director, and Consultant Plan (the “2003 Plan”), together referred to herein as the “Stock Plans”.
 
The 2008 Plan provides for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, and restricted stock and other stock awards. Options granted and shares underlying stock awards issued under the 2008 Plan vest over periods determined by the compensation committee of the board of directors.
 
The 2003 Plan provided for the granting of incentive stock options to employees and non-qualified stock options to employees, directors, and consultants of the Company or its subsidiaries.   In connection with the adoption of the 2008 Plan, the 2003 Plan was frozen. As a result there were no shares of common stock available for future grants under the 2003 Plan at December 31, 2014 and 2013.
 
Incentive stock options and non-qualified stock options were granted under the Stock Plans through December 31, 2014. The options are exercisable for a period not to exceed ten years and vesting for the options and restricted shares granted to date range from being 100% fully vested at grant to 20% immediately vested and the remainder vesting over a three to five year period.
 
As of December 31, 2014, a total of 1,664,639 shares were authorized for grants under the Stock Plans, of which 445,577 were available for future grant.  As of December 31, 2014 there were no restricted stock awards outstanding under the 2008 and 2003 Plans.  As of December 31, 2014, a total of 1,141,779 and 322 stock options were outstanding under the 2008 Plan and 2003 Plans, respectively. As of January 1, 2015, the authorized options under the 2008 Plan increased by 4,154,748 pursuant to the evergreen provision contained in the 2008 Plan.
 
The following table summarizes the Company’s stock plan activity under all of the Company’s stock based compensation plans from January 1, 2013 through December 31, 2014:
 
   
Available
   
Outstanding
   
Exercise
 
   
for Grant
   
Options
   
Price
 
Balance at December 31, 2012
    91,806       266,373     $ 8.15  
Options authorized under the 2008 plan
    852,381       -       -  
Options granted
    (460,502 )     460,502       4.75  
Options forfeited
    70,881       (72,518 )     10.75  
Balance at December 31, 2013
    554,566       654,357       5.45  
Options authorized under the 2008 plan
    378,755       -       -  
Options granted
    (564,598 )     564,598       2.25  
Options forfeited
    76,854       (76,854 )     4.21  
Balance at December 31, 2014
    445,577       1,142,101     $ 3.96  

 

 
Effective with the adoption of FASB ASC 718, Compensation-Stock Compensation, as of January 1, 2006, the Company has elected to use the Black-Scholes option pricing model to determine the fair value of options granted. The Company has not paid and does not anticipate paying cash dividends; therefore the expected dividend rate is assumed to be 0%.  Stock price volatility is based on an analysis of historical stock price data reported for a peer group of public companies and 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.
 
 
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The fair value of stock options granted to employees and non-employee directors was estimated using a Black-Scholes option-pricing model and the following weighted-average assumptions:
 

   
2014
   
2013
 
Estimated dividend yield
           
Expected stock price volatility
    126.86 %     116.14 %
Expected life of option (in years)
    5.86       5.85  
Risk-free interest rate
    1.81 %     1.00 %

 
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. Measurement of share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the term of the related financing or the period over which services are received.
 
The weighted average grant-date fair value of options granted during the years ended December 31, 2014 and 2013 were $1.99 and $3.90, respectively. There were no stock options exercised during the years ended December 31, 2014 and 2013.  The Company did not realize a tax benefit from stock options exercised during the years ended December 31, 2014 and 2013.
 
The following summarizes certain information about fully vested stock options and stock options expected to vest as of December 31, 2014:
 
   
Number of
Options
   
Weighted
Average
Remaining
Contractual Life
(in years)
   
Weighted
Average
Exercise Price
   
Aggregate
Intrinsic Value
 
Outstanding