10-K 1 dara_10k.htm ANNUAL REPORT dara_10k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
 
FORM 10-K
_______________________
 
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to  
                  
Commission file number 000-23776
DARA BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
_______________________
 
Delaware
04-3216862
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
8601 Six Forks Road, Suite 160
 
Raleigh, North Carolina
27615
(Address of principal executive offices)
(Zip Code)
   
Registrant’s telephone number, including area code: (919) 872-5578
_______________________
 
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  þ
 
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  þ
 
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  þ    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).  Yesþ     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 o    Accelerated filer o 
 Non-accelerated filer o       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  þ
 
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2013 was approximately $15,486,542.
 
The number of shares outstanding of the Registrant’s common stock as of January 29, 2014 was approximately 31,073,850.
 


 
 
 
 
 
 
 
Table of Contents
 
PART I
 Item 1. Busines     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     25  
 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.     34  
 Item 8. Financial Statements and Supplementary Data.     35  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.     63  
 Item 9A. Controls and Procedures.     63  
 Item 9B. Other Information.     64  
PART IV
 
 Item 15. Exhibits and Financial Statement Schedules     74   
 
 
 
 
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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®, Bionect® or other products given that we only recently hired our initial sales force and our lack of history as a revenue-generating company; our ability to achieve the desired results from the agreements with Mission and Alamo; FDA and other regulatory risks relating to our ability to market Soltamox®, Gelclair®, Bionect® 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.
 
 
 
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PART I
 
Item 1. Business
 
Overview
 
DARA BioSciences, Inc. (NASDAQ: DARA) is a North-Carolina based specialty pharmaceutical company primarily focused on the commercialization of oncology treatment and oncology supportive care pharmaceutical products. Through our acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, we acquired exclusive U.S. marketing rights to our first commercial, FDA-approved proprietary product Soltamox® (tamoxifen citrate) oral solution. Soltamox has been approved by the U.S. Food and Drug Administration (“FDA”) for the prevention and treatment of breast cancer. On September 7, 2012, we entered into a license agreement with Helsinn Healthcare SA (“Helsinn”) to distribute, promote, market and sell Gelclair®, a unique oral gel whose key ingredients are polyvinlypyrrolidone (PVP) and sodium hyaluronate  (hyaluronic acid), for the treatment of certain approved indications in the United States.  Gelclair is an FDA-cleared product indicated for the treatment of oral mucositis. In addition, we have a marketing agreement with Innocutis Holdings, LLC pursuant to which we promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the U.S. oncology and radiation oncology marketplace. Bionect has been cleared by the FDA for the management of irritation of the skin as well as first and second degree burns.

We have a clinical development asset, KRN5500, which is a Phase 2 product candidate targeted for treating cancer patients with painful treatment-refractory chronic chemotherapy induced peripheral neuropathy (CCIPN).  KRN5500 has been designated a Fast Track Drug by the FDA and we have submitted an application for and are in the process of seeking orphan drug designation for this product.  Fast Track designation is intended to facilitate the development and expedite review of drugs and biologics intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs. Orphan drug designation provides extended market exclusivity, tax benefits, and the waiver of certain fees associated with the FDA approval process.  We are looking to partner the drug with an established pharmaceutical development company to undertake and support further development costs.

As part of our strategic plan to focus on the commercialization of oncology treatment and oncology supportive care products, on June 17, 2013, we granted T3D Therapeutics, Inc. (“T3D”) the exclusive worldwide rights to develop and commercialize DB959, an oral, highly selective, dual PPAR (peroxisome proliferator activated receptor) nuclear receptor agonist, which we developed through Phase 1 clinical trials.  For the license, we received a $250,000 up front payment, a second payment of $25,000 in December 2013, a third payment of $100,000 in January 2014 and, based upon an extension agreement of January 31, 2014, expect to be paid another $125,000 by February 21, 2014 We used the initial $250,000 to pay off $250,000 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 milestone and annual payments payable to Bayer.

On October 25, 2013, we entered into an agreement with Alamo Pharma Services (“Alamo”) pursuant to which Alamo now provides us with a dedicated national sales team of 20 sales representatives to promote our commercial products. In addition, we signed an agreement, exclusive to the oncology market, with Mission Pharmacal (“Mission”), Alamo’s parent company, to share in the costs and expenses of the sales force.   The Alamo sales team, in addition to promoting our products Soltamox (tamoxifen citrate), Gelclair and Bionect, also promotes three Mission products: Ferralet®90, Binosto® (alendronate sodium) and Aquoral®.  The agreements with Alamo and Mission expand our presence in oncology supportive care and the products complement our portfolio in presenting comprehensive offerings to the oncologist.
 
 The sales force became operational with sales representatives trained and in their assigned territories on January 2, 2014.  With the expansion of the sales force to 20 sales representatives, we expect our commercial costs, net of Mission support payments to Alamo to be significantly higher 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 a 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.
 
As we have generated minimal revenues from operations to date, we must have a sufficient level of liquidity in order to successfully achieve our commercial and operational goals.  Our primary source of working capital has been the proceeds of registered direct offerings and private placements of equity securities, and prior sales of securities we acquired through investments made in other companies.  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 and the progress of licensing activities of KRN5500 with pharmaceutical partners.  We continue to pursue other in-licensing opportunities for approved products.
 
DARA BioSciences, Inc. is a Delaware corporation incorporated on December 30, 1993.  Our executive offices are located at 8601 Six Forks Road, Suite 160, Raleigh, North Carolina 27615, and our telephone number is (919) 872-5578. Our Internet address is www.darabio.com. The information on our website is not incorporated by reference into this Form 10-K, and you should not consider it part of this Form 10-K.

 
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Product Commercialization and the Mission Products

Our primary focus is on the commercialization of the following oncology treatment and oncology supportive care pharmaceutical products:
 
  
Soltamox, an FDA-approved oral solution of tamoxifen citrate;
 
  
Cancer support therapeutics, including Gelclair, an FDA-cleared product indicated for the treatment of oral mucositis and Bionect, an FDA cleared product for the management of irritation of the skin as well as first and second degree burns; and
 
  
Three Mission Pharmacal products:  Ferralet 90 (for anemia), Binosto (alendronate sodium effervescent tablet indicated for the treatment of osteoporosis), and Aquoral (for cancer related dry month).

Oral liquid formulations of FDA approved products

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

Soltamox

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

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

In order to commercialize Soltamox, we had initially established a specialty commercial sales force to market Soltamox to oncologists targeting physicians who prescribe tamoxifen.  This initial sales force has now been replaced by the Alamo sales force.  Current physicians who prescribe tablet forms of tamoxifen in the United States are well known and easily identified by data sources such as IMS and Wolters Kluwer, providers of information services for the healthcare industry.
 
We are employing a multi-disciplinary approach to reach and educate health care providers, dispensers, patient advocacy groups, foundations, caregivers and patients directly about our products. We believe we can accomplish this through utilization of a combination of our own specialized sales organization and independent sales representatives, tele-detailing, appropriate levels of product sampling, innovative marketing programs, partnerships with Specialty Pharmacy Providers, working with Patient Advocacy Groups and Foundations as well as collaborative arrangements with third party sales organizations. We have also recently completed a registry survey called CAPTURE to gather information on compliance, adherence and preference for a liquid therapy among current tamoxifen patients and will use the results in clinical publications as well as marketing programs and materials to support increased utilization of Soltamox.

Cancer support therapeutics

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

Gelclair

On September 7, 2012, we entered into a distribution and license agreement with Helsinn Healthcare SA. We were granted an exclusive license to distribute, promote, market and sell Gelclair for treatment of certain approved indications in the United States. Gelclair, a unique oral gel whose key ingredients are polyvinlypyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid), is an FDA-cleared product indicated for the treatment of oral mucositis. Gelclair is protected by a U.S. issued patent which expires in 2021.  Under the license agreement with Helsinn, the Company is 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 United States in April 2013.

Bionect

On March 23, 2012, we entered into an Exclusive Marketing Agreement with Innocutis Holdings, LLC pursuant to which we promote Bionect (hyaluronic acid sodium salt, 0.2%) within the U.S. oncology and radiation oncology marketplace. Bionect has been approved by the FDA for the management of irritation of the skin as well as first and second degree burns.  Previously, Bionect was promoted and sold by Innocutis only in the dermatology market. Innocutis continues to promote Bionect in the dermatology market.  Bionect is protected by a U.S. issued patent that expires in 2016.  We are compensated by Innocutis for each unit sold in the U.S. oncology and radiation oncology market.  We began promoting Bionect in the U.S. oncology and radiation oncology market in the second quarter of 2012.  The term of the agreement will continue until April 1, 2015 and will be automatically renewed in yearly increments unless notice is given by either party 30 days prior to the expiration of the term or extended term.
 
 
 
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Mission Pharmacal Products

On October 25, 2013, we entered into an agreement with Alamo Pharma Services, a subsidiary of Mission Pharmacal, for a twenty (20) person national sales team in the U.S. oncology market. Pursuant to the agreement and a shared sales force agreement with Mission, the Alamo sales team, in addition to promoting DARA's Soltamox, Gelclair and Bionect products, also carries three Mission Pharmacal products: Ferralet 90 (for anemia), BINOSTO (alendronate sodium effervescent tablet indicated for the treatment of osteoporosis), and Aquoral (for cancer related dry mouth). These products are also currently being promoted by Mission in other 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.

Clinical Stage Asset

KRN5500

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

On November 8, 2012 we submitted a request seeking Orphan designation for KRN5500 to the Office of Orphan Products Development at the FDA. The orphan indication we are seeking is in cancer patients with painful treatment- refractory chronic chemotherapy induced peripheral neuropathy (CCIPN).  We are in communication with the FDA regarding this orphan application and, on November 19, 2013, provided them with additional information as requested.
 
Investments
 
Prior to our merger with Point Therapeutics, Inc. in February 2008, we made minority investments in several companies.  At December 31, 2012 we held marketable securities in MRI Interventions, Inc. (“MRI”), (OTBB: MRIC), formerly SurgiVision, Inc.  MRI Interventions became a publicly traded company on May 18, 2012.  As of January 14, 2013, we no longer hold marketable securities in MRI Interventions or any minority investments in other companies.
 
 
6

 
 
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.
 
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.
 
 
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Licenses
 
We hold an exclusive license for the U.S. marketing rights to Soltamox from Rosemont Pharmaceuticals, Ltd., a U.K. based oral liquids specialty pharmaceutical company.  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 Healthcare SA (“Helsinn”) of Switzerland, to distribute, promote, market and sell Gelclair for treatment of certain approved indications in the United States. Gelclair is an FDA-cleared product indicated for the treatment of oral mucositis. We acquired this license on September 12, 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.
 
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 with Massachusetts General Hospital related to the use of certain spicamycin derivatives for use in treating pain.  The effective date of this agreement was May 3, 2004.
 
We have licensed exclusive worldwide rights to compounds from Bayer Pharmaceuticals, Corp. for the treatment of metabolic diseases, including type 2 diabetes. The license has no restrictions on disease indications for therapeutic use.  Bayer retains certain commercialization rights.  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 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, based upon an extension agreement of January 31, 2014, expect to be paid another $125,000 by February 21, 2014.  We used the initial $250,000 to pay off $250,000 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 (sometimes referred to as a “Black Box” Warning) for products for significant risk of severe or life-threatening adverse events. Soltamox has a Black Box warning related to uterine malignances, stroke and pulmonary embolism.  The FDA added this requirement for a Boxed Warning on all tamoxifen products in 2002.  This warning can be found in the full Soltamox prescribing information at www.soltamox.com.
 
 
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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 U.S. Food and Drug Administration (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.
 
Sales and Marketing Activities
 
During 2012 and 2013, we built a commercial organization comprised of professionals in a variety of disciplines, including regional business directors, a trade and national account director, a U.S. head of marketing and a sales administration and operations assistant.

In 2013, our sales organization consisted of field-based regional business directors who focused their efforts on sales and marketing of our product portfolio. Our trade and national accounts manager worked to establish and maintain contracts with wholesalers, retail pharmacy chains, group purchasing organizations, hospital systems and integrated delivery networks, certain large individual hospital accounts and specialty pharmacies.  The trade and national account director also worked with commercial and government payers to assure market access and achieve reimbursement coverage for our products.
 
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, Gelclair and Bionect, also promotes three Mission products: Ferralet 90, Binosto (alendronate sodium) and Aquoral.  The agreements with Alamo and Mission expand our presence in oncology supportive care and the 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, we expect our commercial costs, net of Mission support payments to Alamo, to be significantly higher 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.
 
 
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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 89% of our recognized gross sales of product in 2013, are drug wholesalers: Cardinal Health, McKesson Corporation and Amerisource Bergen Corporation and our Gelclair distributor, OncoMed.

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, clinical material manufacturing costs, process development, research costs, patent costs, pharmacovigilence costs, 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 13 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 2014.   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. We intend to finance our business, in part, through the private placement and public offering of equity and debt securities as needed. On December 23, 2013, we filed a Registration Statement on Form S-1 (File No. 333-193054) that contemplates a public offering of up to $12.5 million of our common stock.  We intend to pursue an offering pursuant to the S-1 Registration Statement in the near term.  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.

When we need additional financing, we cannot provide assurance that it will 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.


Our limited operating history may make it difficult to evaluate our business to date and our future viability.

We are in the early stage of operations and development 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. 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.

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.

 
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Our ability to generate revenues or profits from our products will be dependent upon successful implementation and operation of the dedicated sales force that is being contractually provided to us by a third party. The dedicated sales force launched in early January 2014. Any challenges that may arise in connection with the ongoing implementation 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.

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

Our ability to successfully market our product portfolio, and to generate revenues or profits from our products, will depend upon successful implementation and operation of the shared sales force that Alamo is providing to us under contract. While the sales force became operational with the sales representatives trained and calling on target physicians in their territories on January 2, 2014, 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 third-party coverage or reimbursement.
 
 
 
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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.

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 may market 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 the launch of Soltamox, we have never attempted to commercialize any product. We are in the early stages of building our sales and marketing strategy and organization, and have just commenced our contractual arrangements 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.

 
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We anticipate that initially a relatively small group of products that we commercialize directly will represent a significant portion of net revenues. A decline in the volume or pricing of any of these products, or our inability to satisfy market demand for these products, could have a material adverse effect on our business, financial position and results of operations.

We anticipate that initially sales of a limited number of our products will collectively represent a significant portion of our projected revenues. 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:

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 continue to rely on third parties to manufacture the products we seek to commercialize. If the third parties we contract with do not continue to provide these services to us as contracted, 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.

 
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We continue to 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 (tamoxifen citrate) oral solution, our first proprietary, FDA approved product, is a drug primarily used to treat breast cancer. We are party to an exclusive license and distribution agreement with Rosemont Pharmaceuticals, Ltd., a U.K. based manufacturer, for rights to market Soltamox in the United States. 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 treatment of 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.

Bionect is an FDA-cleared product indicated for the management of irritation of the skin as well as first and second degree burns. We are party to an Exclusive Marketing Agreement with Innocutis Holdings, LLC, for rights to promote Bionect in the U.S. oncology and radiation oncology marketplace. If we breach or fail to perform the material conditions of the agreement, including the minimum sales requirements, we may lose all or some or all of our marketing rights to Bionect, and such loss could have a material adverse effect on our business. For a description of the patent infringement suit in which we and Innocutis have been named as defendants, see the risk factor below captioned “We may be subject to claims that we infringe the intellectual property rights of others, and unfavorable outcomes could harm our business.”

In order to carry the three Mission Pharmacal products: Ferralet 90 (for anemia), BINOSTO (alendronate sodium effervescent tablet indicated for the treatment of osteoporosis), and Aquoral (for cancer related dry mouth), the shared sales team will have to achieve certain minimum sales requirements or we may lose the opportunity to utilize these three products as part of a unique supportive care portfolio which could have a material adverse effect on our business.

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. KRN5500 is in the early stages of development and has not been approved for commercial sale. 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. In fact, a number of pharmaceutical companies have experienced 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.
 
 
 
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    We have submitted an application for and are in the process of seeking orphan drug designation for KRN5500.  Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a drug or biological product available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan product designation must be requested before submitting an NDA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.  In addition to the potential for a period of exclusivity, we may be eligible for grant funding of up to $400,000 per year for four years to defray costs of clinical trial expenses, tax credits for clinical research expenses and potential exemption form the FDA application user fee.
 
If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA will not approve any other applications to market the same drug or biological product for the same indication for seven years, except in limited circumstances, such as (i) the drug’s orphan designation is revoked; (ii) its marketing approval is withdrawn; (iii) the orphan exclusivity holder consents to the approval of another applicant’s product; (iv) the orphan exclusivity holder is unable to assure the availability of a sufficient quantity of drug; or (v) a showing of clinical superiority to the product with orphan exclusivity by a competitor product. If a drug or biological product designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity. There can be no assurances that we will receive orphan drug designation for KRN5500.  If we do not receive such designation, we may be subject to increased competition from other products for the same or similar indications, and future sales of KRN5500 may suffer.
 
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. 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 the newly-launched 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/Chief Medical Officer and our President/Chief Operating 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.

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.

 
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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. As a result, Innocutis has assumed our defense. The defendants filed a motion to dismiss the complaint on February 1, 2013. The litigation is currently stayed pending conclusion of reexamination proceedings in the US Patent and Trademark Office involving the two patents asserted by plaintiff. We believe the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, we believe that the resolution of this matter will not have a material adverse effect on our financial position or results of operations.

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.

 
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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 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.

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.

 
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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.

Clinical testing and manufacture of any intended products, including ones we may seek to partner 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.

Even if our proposed products are approved for market, we will be subject to continuing 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.

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.

 
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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.

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.

 
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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 30,973,850 were issued and outstanding at December 31, 2013, and (ii) 1,000,000 shares of preferred stock, par value $0.01 per share, of which 578 shares of Series A preferred stock, 50 shares of Series B-2 preferred stock and 100 shares of Series B-4 preferred stock were issued and outstanding at December 31, 2013. 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;

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.
 
 
 
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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, 2013, we had 30,973,850 shares of common stock outstanding. As of December 31, 2013, there were 231,200 shares of common stock issuable upon the conversion of outstanding shares of Series A preferred stock, 102,041 shares of common stock issuable upon the conversion of outstanding shares of Series B-2 preferred stock, 204,082 shares of common stock issuable upon the conversion of outstanding shares of Series B-4 preferred stock, 19,555,303 shares of common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $1.27 per share, 3,271,805 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.09 per share, 2,772,835 shares of common stock reserved for future grants and awards under our equity incentive plans and 891,648 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 and Series B-4 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 and Series B-4 preferred stock (currently, $0.49).

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 May 13, 2013, 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 been granted extensions, and pursuant to the current extension, the Company has 180 calendar days, or until May 12, 2014, to regain compliance with the minimum $1.00 price per share requirement. To regain compliance, any time before May 12, 2014, the bid price of our common stock must close at or above $1.00 per share for a minimum of 10 consecutive business days.  The NASDAQ Listing Qualifications Staff’s determination to grant the additional 180 day compliance period was based on the Company’s meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the NASDAQ Capital Market, with the exception of the minimum bid price requirement, and our written notice of our intention to cure the deficiency during this second compliance period by effecting a reverse stock split, if necessary.  We are soliciting stockholder approval authorizing our Board of Directors to effect a reverse stock split at a ratio within the range of 1:5 to 1:15, as determined by our Board of Directors in the event they deem the split advisable, and have filed a definitive proxy statement with the SEC in connection with such proposal and have sent the proxy to our shareholders of record as of December 23, 2013.  If we do not cure the deficiency during this second compliance period, NASDAQ will provide the Company 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.

There can be no assurances 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.

There can be no assurances that we will receive stockholder authorization to effect a reverse stock split.  In the event our stockholders do not authorize a reverse stock split, we may lose our Nasdaq listing and our ability to enter into capital raising and other transactions will be severely limited.

At our special meeting of stockholders scheduled to be held on February 5, 2014, our stockholders are being asked to authorize our board of directors to implement a reverse stock split at a ratio within the range of 1-for-5 to 1-for-15, as determined by our board of directors.  In addition to helping us to regain compliance with NASDAQ’s $1.00 minimum bid price requirement, a reverse stock split will increase proportionately the authorized, unissued and otherwise unreserved shares available to us for financing and strategic transactions.  While a reverse stock split would not change the total number of shares of our common stock authorized for issuance, it will reduce the outstanding number of shares of our common stock.  As of January 31, 2014, 59,896,501 of our 75,000,000 authorized shares of common stock were issued or reserved while only 15,103,499 of our authorized shares were unissued, unreserved and otherwise available for issuance.  Even if the board effected the reverse split at the bottom of the range (1-for-5), we would still have 75,000,000 authorized shares, but only approximately 11,979,300 shares that were issued or reserved for issuance at January 31, 2014. 

 
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We intend to finance our business, in part, through the private placement and public offering of equity and debt securities as needed, including pursuant to the offering proposed to be conducted pursuant to our Registration Statement on Form S-1 (File No. 333-193054) filed on December 23, 2013 which contemplates a public offering of up to $12.5 million of our common stock.  In the event we do not receive stockholder authorization for a reverse stock split, the number of our authorized and otherwise unreserved shares will severely limit our ability to enter into capital raising and any other strategic transactions involving the issuance of equity or securities convertible into equity that we may pursue, and we may need to limit the number of shares offered under our Form S-1 or abandon that transaction.  There can be no assurances that alternative financing opportunities would be available at all or on terms favorable to the Company.  Accordingly, a failure to obtain stockholder approval for the reverse stock split will severely limit our ability to enter into capital raising transactions, and may have an adverse effect on our cash position and our ability to continue to fund our operations

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.

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.
 
On November, 2012, a suit was filed in the United States District Court District of Columbia naming DARA as a defendant. Plaintiff in the suit is GlycoBioSciences, Inc. Also named as defendant is Innocutis Holdings, LLC (“Innocutis”), Plaintiff alleges that defendants’ distribution and sale of Bionect infringes on certain of plaintiff’s patents and plaintiff seeks to enjoin defendants’ alleged patent infringement and seeks unspecified damages and costs. Pursuant to our license agreement with Innocutis, Innocutis is required to indemnify us in connection with this lawsuit.  As a result, Innocutis has assumed our defense. The defendants filed a motion to dismiss the complaint on February 1, 2013. The litigation is currently stayed pending conclusion of reexamination proceedings in the US patent and Trademark Office involving the two patents asserted by plaintiff.  We believe the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, we believe that the resolution of this matter will not have a material adverse effect on our financial position or results of operations.
 
Item 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 ($)     Low ($)  
       2013
           
     First Quarter     1.19       0.76  
     Second Quarter     1.04       0.52  
     Third Quarter      0.72       0.47  
     Fourth Quarter     0.75       0.45  
                 
      2012
               
    First Quarter      2.77       1.19  
    Second Quarter     1.40       0.62  
    Third Quarter     1.38       0.65  
    Fourth Quarter     1.20       0.69  
                 
 
Stockholders
 
Our transfer Agent is American Stock Transfer and Trust Company. On January 29, 2014, the last reported sale price of our common stock on The Nasdaq Capital Market was $0.70 per share.  On January 29, 2014, there were approximately 164 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.
 
 
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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.
 
Overview
 
We are a North-Carolina based specialty pharmaceutical company primarily focused on the commercialization of oncology treatment and supportive care pharmaceutical products.  Through our acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, we acquired exclusive U.S. marketing rights to our first commercial proprietary product, Soltamox® (oral liquid tamoxifen).  Soltamox has been approved by the U.S. Food and Drug Administration (“FDA”) for the prevention and treatment of breast cancer.  On September 7, 2012, we entered into a license agreement with Helsinn Healthcare SA (“Helsinn”), to distribute, promote, market and sell Gelclair®, a unique oral gel whose key ingredients are polyvinylpyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid) for treatment of certain approved indications in the United States. Gelclair is an FDA-cleared product indicated for the treatment of oral mucositis. In addition, we have a marketing agreement with Innocutis Holdings, LLC pursuant to which we promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the U.S. oncology and radiation oncology marketplace.  Bionect has been cleared by the FDA for the management of irritation of the skin as well as first and second degree burns.
 
We have a clinical development asset, KRN5500, which is a phase 2 product candidate targeted for treating cancer patients with painful treatment-refractory chronic chemotherapy induced peripheral neuropathy (CCIPN).  KRN5500 has been designated a Fast Track Drug by the FDA and we have submitted an application for and are in the process of seeking orphan drug designation for this product.  Orphan drug designation provides extended market exclusivity, tax benefits, and the waiver of certain fees associated with the FDA approval process. We are looking to partner the drug with an established pharmaceutical development company to undertake and support further development costs.
 
As part of our strategic plan to focus on the commercialization of oncology treatment and oncology supportive care products, on June 17, 2013, we granted T3D Therapeutics, Inc. (“T3D”) the exclusive worldwide rights to develop and commercialize DB959, an oral, highly selective, dual PPAR (peroxisome proliferator activated receptor) nuclear receptor agonist, which we developed through Phase 1 clinical trials.  For the license, we received a $250,000 up front payment, a second payment of $25,000 in December 2013, a third payment of $100,000 in January 2014 and, based upon an extension agreement of January 31, 2014, expect to be paid another $125,000 by February 21, 2014 We used the initial $250,000 to pay off $250,000 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 milestone and annual payments payable to Bayer.

On October 25, 2013, we entered into an agreement with Alamo Pharma Services (“Alamo”) pursuant to which Alamo now provides us with a dedicated national sales team of 20 sales representatives to promote our commercial products. In addition, we signed an agreement, exclusive to the oncology market, with Mission Pharmacal (“Mission”), Alamo’s parent company, to share in the costs and expenses of the sales force.   The Alamo sales team, in addition to promoting our products Soltamox (tamoxifen citrate), Gelclair and Bionect, also promotes three Mission products: Ferralet® 90, Binosto® (alendronate sodium) and Aquoral®.  The agreements with Alamo and Mission expand our presence in oncology supportive care and the products complement our portfolio in presenting comprehensive offerings to the oncologist.
 
 
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 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, we expect our commercial costs, net of the Mission support payments to Alamo, to be significantly higher 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 recognized net revenue for 2013 is $419,322 (deferred net revenue - $142,269) primarily from Soltamox and from the launch of Gelclair in the second quarter of 2013.  We have liquidated or distributed to our stockholders all of our investments made in other companies.  Our primary sources of working capital have been proceeds from the sale of our securities and proceeds from the prior sales of securities held in subsidiary companies and marketable securities.
 
We expect to continue to incur operating losses in the near-term.  Our results may vary depending on many factors, including our ability to build a successful 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:
 
  
Soltamox, an FDA-approved oral solution of tamoxifen citrate;
 
  
Cancer support therapeutics, including Gelclair, an FDA-cleared product indicated for the treatment of oral mucositis and Bionect, an FDA-cleared product for the management of irritation of the skin as well as first and second degree burns; and
 
  
Three Mission Pharmacal products:  Ferralet 90 (for anemia), Binosto (alendronate sodium effervescent tablet indicated for the treatment of osteoporosis), and Aquoral (for cancer related dry month).
 
We currently have an exclusive license to a FDA approved product, Soltamox, an exclusive license to distribute, promote and market a FDA cleared product, Gelclair, a marketing agreement to promote Bionect within the oncology and radiation oncology marketplace, and a marketing agreement to copromote three Mission products:  Ferralet 90, Binosto, and Aquoral.  We are working to expand our portfolio to include additional products through licenses and other collaborative arrangements.
 
 
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Oral liquid formulations of FDA approved products
 
Oral liquids can provide an attractive and effective alternative to solid dose formulations for those patients with dysphagia, or difficulty swallowing, or those who simply prefer to take drug products in liquid form.  Those suffering from dysphagia often have difficultly or experience pain when using oral tablet or capsule products and can benefit greatly from liquid formulations of drugs.  In addition, breast cancer patients receiving chemotherapeutic agents are subject to oral mucositis, which makes liquid medical formulations preferable.
 
     Soltamox
 
Soltamox (tamoxifen citrate) oral solution, our first proprietary, FDA approved product, is a drug primarily used to treat breast cancer.  Soltamox is the only liquid formulation of tamoxifen available for sale in the United States.  As a result of our acquisition of Oncogenerix, we became party to an exclusive license and distribution agreement with Rosemont Pharmaceuticals, Ltd. (“Rosemont”), a U.K. based manufacturer, for rights to market Soltamox in the United States.  Previously, Soltamox was marketed only in the U.K. and Ireland by Rosemont Pharmaceuticals, Ltd.  Soltamox is protected by a U.S. issued patent which expires in June, 2018.  Under our license agreement with Rosemont, we are obligated to meet minimum sales thresholds during the License Agreement’s seven-year term.  We launched Soltamox in the U.S. in the fourth quarter of 2012.
 
Soltamox is used primarily for the chronic treatment of breast cancer or for cancer prevention in certain susceptible breast cancer subgroups.  The National Cancer Institute (NCI) estimated that in 2012 229,060 women would be diagnosed with breast cancer and 39,920 women would die as a result of the disease.  Tamoxifen therapy is generally indicated for breast cancer patients for up to 5 years.   The FDA requires a Boxed Warning (sometimes referred to as a “Black Box” Warning) for products for significant risk of severe or life-threatening adverse events. Soltamox has a Black Box warning related to uterine malignances, stroke and pulmonary embolism.  The FDA added this requirement for a Boxed Warning on all tamoxifen products in 2002.  This warning can be found in the full Soltamox prescribing information at www.soltamox.com.
 
In order to commercialize Soltamox, we had initially established a specialty commercial sales force to market Soltamox to oncologists, targeting physicians who prescribe tamoxifen. This initial sales force has now been replaced by the Alamo sales force. Current physicians who prescribe tablet forms of tamoxifen in the United States are well known and easily identified by data sources such as IMS and Wolters Kluwer, providers of information services for the healthcare industry.
 
We are employing a multi-disciplinary approach to reach and educate health care providers, dispensers, patient advocacy groups, foundations, caregivers and patients directly. We believe we can accomplish this through utilization of a combination of our own specialized sales organization and independent sales representatives, tele-detailing, appropriate levels of product sampling, innovative marketing programs, partnerships with Specialty Pharmacy Providers, working with Patient Advocacy Groups and Foundations as well as collaborative arrangements with third party sales organizations.  We have also recently completed a registry survey called CAPTURE to gather information on compliance, adherence and preference for a liquid therapy among current tamoxifen patients and will use the results in clinical publications as well as marketing programs and material to support increased utilization of Soltamox.
 
Cancer support therapeutics
 
We are also focusing on the commercialization of cancer support therapeutics.
 
Gelclair
 
On September 7, 2012, we entered into a distribution and license agreement with Helsinn Healthcare SA.  We were granted an exclusive license to distribute, promote, market and sell Gelclair for treatment of certain approved indications in the United States.  Gelclair, a unique oral gel whose key ingredients are polyvinlypyrrolidone (PVP) and sodium hyaluronate (hyaluronic acid), is an FDA-cleared product indicated for the treatment of oral mucositis. Gelclair is protected by a U.S. issued patent which expires in 2021. Under the license agreement with Helsinn, we are obligated to meet minimum sales thresholds during the ten-year term.  The License Agreement also provides that we will receive exclusive rights to distribute, promote, market and sell Gelclair for an additional indication if Helsinn is able to obtain regulatory approval for such indication.  We launched Gelclair in the U.S. in April, 2013.
 
 
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Bionect
 
On March 23, 2012, we entered into an Exclusive Marketing Agreement with Innocutis Holdings, LLC pursuant to which we  promote Bionect (hyaluronic acid sodium salt, 0.2%) within the U.S. oncology and radiation oncology marketplace.  Bionect has been approved by the FDA for the management of irritation of the skin as well as first and second degree burns. Previously, Bionect was promoted and sold by Innocutis only in the dermatology market.  Innocutis continues to promote and sell Bionect in the dermatology market.   Bionect is protected by a U.S. issued patent that expires in 2016. We are compensated by Innocutis for each unit sold in the U.S. oncology and radiation oncology market.  We began promoting Bionect in the U.S. oncology and radiation oncology market in the second quarter of 2012.  The term of the agreement will continue until April 1, 2015 and will be automatically renewed in yearly increments unless notice is given by either party 30 days prior to the expiration of the term or extended term.
 
Mission Pharmacal Products

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

Clinical Stage Asset
 
KRN5500
 
KRN5500 is a novel, non-narcotic/non-opioid intravenous product for the treatment of painful chronic chemotherapy induced peripheral neuropathy in patients with cancer. The drug has successfully completed a Phase 2a proof of concept study in patients with advanced cancer and analgesia-resistant neuropathic pain where it showed statistically-significant pain reduction versus placebo (p = 0.03) using standardized pain test scores. There were no major safety concerns although nausea and vomiting were a common occurrence. The FDA has designated KRN5500 a Fast Track drug, based on its potential usefulness in treating a serious medical condition and in fulfilling an unmet medical need. We have improved and simplified the formulation and manufactured new drug substance for the next clinical trial.  We are in discussions with the National Cancer Institute (NCI) to design an additional clinical trial under joint DARA-NCI auspices. Since KRN5500 would complement our portfolio of oncology treatment and supportive care pharmaceuticals, we are looking to partner the drug with an established oncology development company to undertake and support the cost for the Phase 2b program.
 
On November 8, 2012 we submitted a request seeking Orphan designation for KRN5500 to the Office of Orphan Products Development at the FDA.  The orphan indication we are seeking is in cancer patients with painful treatment-refractory chronic chemotherapy induced peripheral neuropathy (CCIPN).  We are in communication with the FDA regarding this orphan application and on November 19, 2013 provided them with additional information as requested.  We incurred $820,791 in costs associated with the development of KRN5500 during 2013, and we have incurred third party costs of $6,192,263 from inception to date.
 
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.
 
 
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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 mostly to wholesalers who, in-turn, sell the product to hospitals and other end-user customers. Sales to wholesalers provide for selling prices that are fixed on the date of sale, although we offer certain discounts to group purchasing organizations and governmental programs. The wholesalers take title to the product, bear the risk of loss of ownership, and have economic substance to the inventory.
 
 
We allow for product to be returned beginning prior to and following product expiration. We do not believe that we have sufficient sales and returns history at this time to reasonably estimate product returns from our wholesaler distribution channel. Therefore, we are deferring the recognition of revenue until the wholesalers sells their product to hospitals or other end-user customers. We will continue to defer revenue recognition until the point at which we have obtained sufficient sales history to reasonably estimate returns from the wholesalers and inventory levels are reduced to normalized amounts. Shipments of product that are not recognized as revenue are treated as deferred revenue until evidence exists to confirm that pull through sales to hospitals or other end-user customers have occurred.   Revenue is recognized from product sales directly to hospitals, clinics, and pharmacies when the merchandised is shipped.
 
 
We recognize sales allowances as a reduction of revenues in the same period the related revenue is recognized. Sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with wholesale distributors and the levels of inventory within the distribution channels that may result in future discounts taken. We must make significant judgments in determining these allowances. If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future, which could have an effect on revenue in the period of adjustment. The following briefly describes the nature of each provision and how such provisions are estimated
 
  
Payment discounts are reductions to invoiced amounts offered to customers for payment within a specified period and are estimated upon shipment utilizing historical customer payment experience.
 
  
Although the Company does not have significant experience with its current products, the returns provision is based on management's return experience for similar products and is booked as a percentage of product sales recognized during the period.  These recognized sales include shipments that have occurred out of wholesalers as well as direct shipments made by the Company to other third party purchasers.  As the Company gains greater experience with actual returns related to its specific products the returns provisions and related reserves will be adjusted accordingly. The returns reserve is recorded as a reduction of revenue in the same period the related product sales revenue is recognized and is included in accrued expenses.
 
  
Generally, credits may be issued to wholesalers for decreases that are made to selling prices for the value of inventory that is owned by the wholesaler at the date of the price reduction.  Price adjustment credits are estimated at the time the price reduction occurs and the amount is calculated based on the level of the wholesaler inventory at the time of the reduction.
 
  
There are arrangements with certain parties establishing prices for products for which the parties independently select a wholesaler from which to purchase.  Such parties are referred to as indirect customers.  A chargeback represents the difference between the sales invoice price to the wholesaler and the indirect customer's contract price, which is lower.  Provisions for estimating chargebacks are calculated primarily using historical chargeback experience, contract pricing and sales information provided by wholesalers and chains, among other factors. The Company recognizes chargebacks in the same period the related revenue is recognized.
 
 
29

 
 
Inventory
 
Inventory at December 31, 2013 and 2012 was $104,089 and $125,275, respectively and consisted of finished goods.  We state finished goods inventories at the lower of cost (which approximates actual cost on a first-in, first-out cost method) or market value. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell such inventory, remaining shelf life, and current and expected market conditions, including levels of competition. Inventory adjustments are measured as the difference between the cost of the inventory and estimated market value based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
 
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, 2013 and 2012 a valuation allowance has been recorded to reduce the net deferred tax asset to zero.
 
The Company's policy for recording interest and penalties is to record them as a component of interest income (expense), net.
 
As of December 31, 2013 and 2012, respectively, the Company had an estimated $211,000,000 and $203,122,000 of U.S. Federal net operating loss carryforwards that will begin to expire in 2018.  The Company also has an estimated $45,700,000 and $37,716,000 of state net economic loss carryforwards that will begin to expire in 2022.  Additionally, the Company has research and development credits of approximately $2,830,000 and $2,830,000 for federal tax purposes that will begin to expire in 2027.
 
The Internal Revenue Code provides limitations on utilization of existing net operating losses and tax credit carryforwards against future taxable income based upon changes in share ownership. If these changes have occurred, the ultimate realization of the net operating loss and R&D credit carryforwards could be permanently impaired.
 
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, certain promotional allowances to customers, co-pay assistance and administration costs and advertising costs.
 
Research and Development Expenses
 
We expense research and development costs as incurred.  Research and development costs include personnel and personnel related costs, clinical material manufacturing costs, process development, research costs, patent costs, pharmacovigilence costs, PDUFA fees, regulatory costs and other consulting and professional services.
 
Valuation of Goodwill and Acquired Intangible Assets

We have recorded goodwill and acquired intangible assets related to our 2012 acquisition. When identifiable intangible assets  are acquired, we determine the fair values of the assets as of the acquisition date.
 
Intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events occur.

Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination and is not amortized. Goodwill is subject to impairment testing at least annually or when a triggering event occurs that could indicate a potential impairment. We are organized as a single reporting unit and therefore the goodwill impairment test is done using our overall market value, as determined by our traded share price, as compared to our book value of net assets. We completed our annual impairment test as of December 31, 2013 and determined the carrying value of goodwill was not impaired.
 
 
30

 
 
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 11 - Share Based Compensation, included in the condensed consolidated financial statements appearing elsewhere in this report, for additional information regarding our adoption of ASC 718.
 
Significant Judgments and Estimates
 
The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at our balance sheet date.  Such estimates include the carrying value of property and equipment and the value of certain liabilities.  Actual results may differ from such estimates.
 
Results of Operations
 
Net revenues and cost of product sales increased by $365,693 and $195,124 from $53,629 and $23,804 for the year ended December 31, 2012 to $419,322 and $218,928 for the year ended December 31, 2013, respectively due to the launch of Soltamox in the fourth quarter of 2012 and the launch of Gelclair in the second quarter of 2013.  2012 revenues consisted of only one quarter of Soltamox revenues while 2013 consists of twelve months of Soltamox revenues and nine months of Gelclair revenues.
 
Sales and marketing costs consist of salaries and benefits to sales and marketing personnel, marketing programs, and distribution establishment costs.  Sales and marketing expense increased by $2,230,071 from $1,609,601 for the year ended December 31, 2012 to $3,839,672 for the year ended December 31, 2013 as a result of the Company’s merger with Oncogenerix and the costs incurred in establishment of a sales and marketing infrastructure to support the promotion of Bionect, Soltamox and Gelclair.  In the 2012 period, we were in the process of building the necessary commercial infrastructure.  2013 reflects a full year of commercial infrastructure, including the costs associated with implementing and training the contract sales force with Alamo.
 
Research and development expenses decreased by $781,110 from $2,734,517 for the year ended December 31, 2012 to $1,953,407 for the year ended December 31, 2013, primarily as a result of lower license fee payments to Uman ($125,000) and a decrease in license expense to Bayer ($250,000),  as well as the reduction in research and development expense in 2013resulting from the the Bayer license amendment  ($125,000).
 
General and administrative expenses consist primarily of salaries and benefits, professional fees related to administrative, finance, human resource, legal and information technology functions.  In addition, general and administrative expenses include facility, basic operational and support costs and insurance costs.  General and administrative expenses decreased by $397,353 from $4,663,359 for the year ended December 31, 2012 to $4,266,006 for the year ended December 31, 2013, primarily as a result of decreases in investor relations expense ($496,000) and legal and professional fees ($333,000) offset by increases in salaries ($278,000)  and relocation costs ($51,000).
 
Depreciation and amortization expense decreased by $28,789 from $659,441 for the year ended December 31, 2012 to $630,652 for the year ended December 31, 2013, primarily as a result of lower amortization expense resulting from the 2012 write off of a license agreement.
 
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 decreased by $446,782 from $596,885 of income for the year ended December 31, 2012 to $150,103 of income for the year ended December 31, 2013, primarily as a result of the decrease of $536,889 in gain from sale of marketable securities and nonmonetary assets and by accretion of interest expense associated with discounted Helsinn milestone liabilities.  This decrease was partially offset by $125,000 in license revenue (net of 2013 Bayer accrual) recognized in other income during 2013 related to the sublicense of DB959 to T3D Therapeutics, Inc.
 
Consolidated net loss increased by $2,627,453 from $7,740,371 for the year ended December 31, 2012 to $10,367,824 for the year ended December 31, 2013, primarily due to the factors discussed above.
 
 
31

 
 
Liquidity and Capital Resources
 
Overview
 
From inception through December 31, 2013, 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 $53,344,720 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,
 
   
2013
   
2012
 
Current assets
  $ 3,888,637     $ 7,044,827  
Current liabilities
    1,675,061       2,038,862  
Working capital
  $ 2,213,576     $ 5,005,965  
 
At December 31, 2013, our principal sources of liquidity were our cash and cash equivalents which totaled $3,425,543. As of December 31, 2013, we had working capital of $2,213,576.  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, 2012 to December 31, 2013, our working capital decreased by $2,792,389 due to cash used in operating activities of approximately $9,129,000, partially offset by cash provided by investing activities of approximately $82,000 and cash provided by financing activities of approximately $6.0 million.
 
We have incurred significant net losses and have had negative cash flows from operations during each period from inception through December 31, 2013 and have an accumulated deficit of $56,992,595 at December 31, 2013. Management expects operating losses and negative cash flows to continue through 2014 and the foreseeable future.
 
Cash Flows
 
      2013        2012  
Cash used in operating activities
  $ (9,129,307 )   $ (7,021,194 )
                 
Cash provided by investing activities
    81,787       459,346  
                 
Cash provided by financing activities
    5,976,606       11,879,148  
                 
Net (decrease) increase in cash and cash equivalents
  $ (3,070,914 )   $ 5,317,300  

     Our cash used in operating activities for the year ended December 31, 2013 compared to our cash used in operating activities for the year ended December 31, 2012 increased by $2,108,113 primarily due to the increase in consolidated net loss of $2,627,453, which was driven primarily by the increase in sales and marketing expenses of $2,230,071, as explained above.
 
Our net cash provided by investing activities during the year ended December 31, 2013 was $81,787 which consisted of proceeds received from the sale of marketable securities of $94,005 offset by purchases of furniture and fixtures of $12,218.  Our cash provided by investing activities during the year ended December 31, 2013 compared to our cash provided by investing activities for the year ended December 31, 2013 decreased by $377,559 primarily due to a $652,691 decrease in proceeds from marketable securities, partially offset by the decrease of $250,000 in the purchase of license rights.
 
Our net cash provided by financing activities for the year ended December 31, 2013 compared to our net cash provided by financing activities for the year ended December 31, 2012 decreased by $5,902,542 primarily due to the $5,755,756 decrease in net proceeds from issuances of preferred and common stock .
 
 
32

 
 
Financial Condition
 
The Company funded its 2013 operations primarily from net proceeds from equity securities issued totaling approximately $4,942,000 in 2013 and from net proceeds from the exercise of warrants totaling approximately $1,221,000 in 2013. The Company ended 2013 with cash and cash equivalents totaling approximately $3,426,000.   Management believes that, based upon its current operating plan, that such currently available funds, together with projected sales of Soltamox and Gelclair in 2014 will enable the Company to fund its planned operations and to meet its obligations through the first quarter of 2014.  These obligations over the next twelve months include, but are not limited to, lease commitments of approximately $168,000, anticipated fixed license obligations of approximately $125,000 and minimum sales force obligations of approximately $814,000.  The Company will need additional funds to meet its obligations and fund operations beyond that time.
 
On December 23, 2013, the Company filed with the SEC a Registration Statement on Form S-1 for a proposed public offering of up to $12.5 million of common stock (the “Proposed Offering”). The Company intends to work towards consummating the Proposed Offering during the first quarter of 2014. The exact terms of the Proposed Offering are not known, and the actual number of shares of common stock that the Company sells will depend on multiple factors, including market conditions and the market price of the Company’s common stock. Based on the current market price of the Company’s common stock, the Company does not have sufficient authorized and unreserved shares to sell the full $12.5 million being registered pursuant to the Registration Statement unless the Board effects a Reverse Stock Split, subject to shareholder approval which the Company is soliciting pursuant to its definitive proxy statement filed on December 24, 2014.  A Reverse Stock Split would create a decrease to the Company’s issued and outstanding shares and would provide the Company with sufficient authorized shares to sell the entire amount to be covered by the Registration Statement. If the proposal for a Reverse Stock Split is not approved by shareholders, and the Board therefore does not receive authorization to effect a Reverse Stock Split, the Company will not have sufficient shares available for issuance in order to raise the full $12.5 million in the Proposed Offering, and will need to either reduce the amount or pursue other financing alternatives, which may not be available to the Company or, if available, may not be available on favorable terms. Even if this proposal is approved and a Reverse Stock Split is effected, there can be no assurance that market conditions will permit the Company to sell $12.5 million or any other particular amount of common stock in the Proposed Offering. If for any reason the Company is not able to proceed with a capital raise on the terms set forth in the Registration Statement, it is likely that any alternative financing that the Company would pursue would require more authorized and unissued common stock than it currently has available.

As discussed above, we believe we have sufficient working capital to continue our operations through the first quarter of 2014.  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.
 
 
 
33

 
 
Off-Balance Sheet Arrangements
 
We had no off-balance sheet arrangements as of December 31, 2013.
 
Recent Accounting Pronouncements
 
In accordance with the guidance of FASB issued in Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), the Company adopted the requirement to separately report its comprehensive income.  Other comprehensive income refers to revenue, expenses, gains, and losses that are recorded directly as an adjustment to shareholders’ equity. These changes became effective for the Company in the first quarter of 2012 and are reflected in the consolidated statement of operations and comprehensive income/loss. The adoption of ASU 2011-05 did not have a material impact on the Company’s financial statements.
 
In May 2011, FASB amended the fair value measurement and disclosure guidance in ASC 820, Fair Value Measurement, to converge US GAAP and IFRS requirements for measuring amounts at fair value as well as disclosures about these measurements. FASB ASC 820 is effective for interim and annual periods beginning after December 15, 2011. The Company’s application of FASB ASC 820 did not have a material effect on the Company’s consolidated results of operations and financial position.
 
Recent Accounting Pronouncements Not Yet Effective
 
There have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our consolidated financial statements.
 
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
 
Not applicable.
 
 
34

 
 
Item 8. Financial Statements and Supplementary Data.
 

 
DARA BioSciences, Inc.
INDEX TO FINANCIAL STATEMENTS
 
 
       
   
Page
 
Report of Independent Registered Public Accounting Firm
 
36
 
       
Consolidated Balance Sheets at December 31, 2013 and 2012
 
37
 
       
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2013 and 2012
 
38
 
       
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013 and 2012
    39  
         
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012
    41  
         
Notes to Consolidated Financial Statements
    42  
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
35

 
 
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, 2013 and 2012, 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, 2013 and 2012, 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.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred significant net losses and has had negative cash flows from operations during each period from inception through December 31, 2013. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ HORNE LLP

Ridgeland, Mississippi
February 4, 2014

 
36

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
   
December 31,
 
   
2013
   
2012
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 3,425,543     $ 6,496,457  
Investment-available-for-sale, at fair value
          96,346  
Accounts receivable
    174,086       173,382  
Inventory
    104,089       125,275  
Prepaid expenses and other assets, current portion
    184,919       153,367  
Total current assets
    3,888,637       7,044,827  
                 
Furniture, fixtures and equipment, net
    40,614       50,190  
Restricted cash
    12,882       12,875  
Prepaid expenses and other assets, net of current portion
          54,439  
Intangible assets, net
    3,224,711       3,708,569  
Goodwill
    821,210       821,210  
Total assets
  $ 7,988,054     $ 11,692,110  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 619,566     $ 1,382,881  
Accrued liabilities
    785,016       326,713  
Accrued compensation
    124,293       172,250  
Deferred revenue
    142,269       149,848  
Capital lease obligation, current portion
    3,917       7,170  
Total current liabilities
    1,675,061       2,038,862  
                 
Deferred lease obligation
    72,729       40,865  
License milestone liability, non-current
    662,215       599,446  
Capital lease obligation, net of current portion
    16,044       19,962  
                 
Total liabilities
    2,426,049       2,699,135  
                 
Stockholders’ equity:
               
Preferred stock, $0.01 par value, 1,000,000 shares authorized at December 31, 2013 and 2012.
 
Series A Preferred stock, 4,800 shares designated,
   578 shares issued and outstanding at December 31, 2013,
   828 shares issued and outstanding at December 31, 2012.
    5       8  
Series B2 Preferred stock, 15,000 shares designated,
   50 shares issued and outstanding at December 31, 2013.
   1,110 shares issued and outstanding at December 31, 2012.
    1       11  
Series B3 Preferred stock, 2,550 shares designated,
  0 shares issued and outstanding at December 31, 2013 and 2012.
           
Series B4 Preferred stock, 250 shares designated,
   100 shares issued and outstanding at December 31, 2013,
   0 shares issued and outstanding at December 31, 2012.
    1        
Common stock, $0.01 par value, 75,000,000 shares authorized,
   30,973,850 shares issued and outstanding at December 31, 2013,
   18,947,094 shares issued and outstanding at December 31, 2012.
    309,739       189,471  
Accumulated other comprehensive income, net of taxes
          45,469  
Additional paid-in capital
    63,292,294       56,430,227  
Accumulated deficit
    (56,992,595 )     (47,027,581 )
                 
Total stockholders’equity before noncontrolling interest
    6,609,445       9,637,605  
Noncontrolling interest
    (1,047,440 )     (644,630 )
                 
Total stockholders' equity
    5,562,005       8,992,975  
                 
Total liabilities and stockholders’ equity
  $ 7,988,054     $ 11,692,110  
                 
           
   
The accompanying notes are an integral part of these consolidated financial statements.
 
 
37

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
   
Year Ended December 31,
 
   
2013
   
2012
 
             
Net revenues
  $ 419,322     $ 53,629  
                 
Costs and expenses:
               
   Cost of goods sold
    218,928       23,804  
Sales and marketing
    3,839,672       1,609,601  
Research and development
    1,953,407       2,734,517  
General and administrative
    4,266,006       4,663,359  
Depreciation and amortization of intangibles
    630,652       659,441  
Total costs and expenses
    10,908,665       9,690,722  
Loss from operations
    (10,489,343 )     (9,637,093 )
                 
Other income (expense):
               
Gain on sale of marketable securities and nonmonetary assets
    71,712       608,601  
Other income, net
    144,965        
Interest (expense), net
    (66,574 )     (11,716 )
Other income
    150,103       596,885  
                 
Net loss before income tax expense
    (10,339,240 )     (9,040,208 )
Income tax benefit (expense)
    (28,584 )     1,299,837  
Consolidated net loss
    (10,367,824 )     (7,740,371 )
Loss attributable to noncontrolling interest
    402,810       429,338  
Loss attributable to controlling interest
  $ (9,965,014 )   $ (7,311,033 )
                 
Basic and diluted net loss per common share
               
   attributable to controlling interest
  $ (0.39 )   $ (0.60 )
                 
Shares used in computing basic and diluted net loss per
               
common share
    25,661,282       12,110,386  
                 
Comprehensive Loss:
               
Consolidated net loss
  $ (10,367,824 )   $ (7,740,371 )
Other comprehensive income
               
Unrealized gain (loss) on investments available for sale
    (2,341 )     682,654  
Reclassification adjustments for gains included in net loss
    (71,712 )     (608,601 )
Income taxes related to other comprehensive income (loss)
    28,584       (28,584 )
Other comprehensive income (loss), net of tax
    (45,469 )     45,469  
Comprehensive Loss
    (10,413,293 )     (7,694,902 )
Comprehensive loss attributable to noncontrolling interest
    402,810       429,338  
Comprehensive loss attributable to controlling interest
  $ (10,010,483 )   $ (7,265,564 )
 
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
         
                                                           
Accumulated
 
(Deficit)
         
   
Series A
 
Series B-1
 
Series B-2
 
Series B-3
 
Series B-4
         
Additional
     
Other
 
Before
     
Total
 
   
Convertible
 
Convertible
 
Convertible
 
Convertible
 
Convertible
         
Paid-In
 
Accumulated
 
Comprehensive
 
Noncontrolling
 
Noncontrolling
 
Stockholders’
 
   
Preferred Stock
 
Preferred Stock
 
Preferred Stock
 
Preferred Stock
 
Preferred Stock
 
CommonStock
     
Capital
 
Deficit
 
Income
 
Interest
 
Interest
 
Equity
 
   
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
                         
                                                                           
Balance at December 31, 2011
    828   $ 8       $ -       $ -       $ -       $ -     5,600,804   $ 56,008   $ 40,834,972   $ (39,716,548 ) $ -   $ 1,174,440   $ (215,292 ) $ 959,148  
                                                                                                       
Share-based compensation
                -                             400,000     4,000     807,858         -     811,858         811,858  
Issuance of common stock Oncogenerix merger
                                            1,337,471     13,375     2,750,734         -     2,764,109         2,764,109  
Issuance of common stock from exercise of warrants
                                            1,170,200     11,702     1,158,498         -     1,170,200         1,170,200  
Issuance of B-1 preferred stock, net of issuance costs of $139,500
            1,700     17                                     1,174,043         -     1,174,060         1,174,060  
Issuance of B-1 warrants
                                                    386,440         -     386,440         386,440  
Issuance of B-2 preferred stock, net of issuance costs of $1,066,532
                    10,250     103                             5,014,670         -     5,014,773         5,014,773  
Issuance of B-2 warrants @ $1.00
                                                      2,107,551         -     2,107,551         2,107,551  
Issuance of B-2 warrants @ $1.25
                                                    2,061,145         -     2,061,145         2,061,145  
Modification of B-2 warrants
                                                    238,593     -     -     238,593         238,593  
Conversion of preferred stock to common stock
            (1,700 )   (17 )   (9,140 )   (92 )                   10,438,619     104,386     (104,277         -              
                                                                                                       
Net loss
                                                        (7,311,033 )   -     (7,311,033 ) $ (429,338 )   (7,740,371 )
Net change in unrealized gain on investments available-for-sale, net of taxes
                                                            45,469     45,469         45,469  
                                                                                                               
Balance at December 31, 2012
    828     8         -     1,110     11     -     -     -     -     18,947,094     189,471     56,430,227     (47,027,581 )   45,469     9,637,605     (644,630 )   8,992,975  
 
 
 
39

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
 
                                                                                                               
Share-based compensation
                -                             40,000     400     818,384         -     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 stock
                -                             (200,000 )   (2,000 )   2,000         -         -      
Issuance of common stock, net of issuance costs of $388,000
                -                             5,566,767     55,668     1,414,813         -     1,470,481     -     1,470,481  
Issuance of warrants with common stock
                -                                     956,231         -     956,231              
Issuance of common stock from exercise of warrants
                -                             1,463,874     14,639     1,206,460         -     1,221,099     -     1,221,099  
Conversion of preferred stock to common stock
    (250 )   (3 )       -     (1,060 )   (10 )   (2,550 )   (26 )   (150 )   (2 )   5,156,115     51,561     (51,520 )       -         -      
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     30,973,850   $ 309,739   $ 63,292,294   $ (56,992,595 ) $ -   $ 6,609,445   $ (1,047,440 ) $ 4,605,774  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
40

 
 
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year Ended December 31,
 
   
2013
   
2012
 
Operating activities
           
Consolidated net loss
  $ (10,367,824 )   $ (7,740,371 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
    Depreciation and amortization
    630,652       659,441  
    Deferred income tax expense (benefit)
    28,584       (1,299,837 )
    Accretion of debt discount and other
    65,844       17,738  
    Share-based compensation
    818,784       811,858  
    Expense of B-2 warrant modification
          238,593  
    Gain on sale of investments
    (71,712 )     (608,601 )
    Deferred lease obligation
    31,864       31,766  
    Changes in operating assets and liabilities, net of effect of acquisitions:
               
       Accounts receivable
    (704 )     (173,382 )
       Inventory
    21,186       (125,275 )
       Prepaid expenses and other assets
    189,359       200,224  
       Accounts payable and accrued liabilities
    (475,340 )     966,652  
Net cash used in operating activities
    (9,129,307 )     (7,021,194 )
                 
Investing activities
               
Purchases of furniture, fixtures and equipment
    (12,218 )     (18,063 )
Purchases of license rights
          (250,000 )
Cash received in the Oncogenerix merger
          10,632  
Purchase of investments in affiliates
          (29,919 )
Proceeds from sale of investments
    94,005       746,696  
Net cash provided by investing activities
    81,787       459,346  
                 
Financing activities
               
Repayments of capital lease obligation
  $ (7,172 )   $ (14,928 )
Repayments on other financing
    (179,754 )      
Proceeds from exercise of warrants
    1,221,099       1,170,200  
Proceeds from issuance of preferred stock, common stock,
               
 and warrants, net of issuance costs
    4,942,440       10,698,197  
Change in restricted cash
    (7 )     25,679  
Net cash provided by financing activities
    5,976,606       11,879,148  
                 
Net (decrease) increase in cash and cash equivalents
    (3,070,914 )     5,317,300  
                 
Cash and cash equivalents at beginning of period
    6,496,457       1,179,157  
Cash and cash equivalents at end of period
  $ 3,425,543     $ 6,496,457  
                 
Supplemental disclosure of non-cash investing and financing activity
               
License milestone liability
  $ 125,000     $ 703,634  
Common stock and contingent consideration issued in Oncogenerix merger
          2,764,109  
B-2 warrant modification
          238,593  
Shares issued to third party for services
          248,800  
 
The accompanying notes are an integral part of these consolidated financial statements
 

 
41

 
 
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 focused on the commercialization of oncology treatment and oncology supportive care pharmaceutical products.  Through its acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, the Company acquired exclusive U.S. marketing rights to its first commercial, FDA-approved proprietary product license Soltamox® (tamoxifen citrate) oral solution.   Soltamox has been approved by the U.S. Food and Drug Administration (“FDA”) for the prevention and treatment of breast cancer. On September 12, 2012 the Company entered into a license agreement with Helsinn Healthcare SA (“Helsinn”) to distribute, promote, market and sell Gelclair®, a unique oral gel whose key ingredients are polyvinylpyrrolidone (PV) and sodium hyaluronate (hyaluronic acid) for the treatment of certain approved indications in the United States. Gelclair is an FDA-cleared product indicated for the treatment of oral mucositis. In addition, the Company has a marketing agreement with Innocutis Holdings, LLC pursuant to which it promotes Bionect® (hyaluronic acid sodium salt, 0.2%) within the oncology and radiation oncology marketplace.  Bionect has been cleared by the FDA for the management of irritation of the skin as well as first and second degree burns.
 
The Company has a clinical development asset, KRN5500, which is a Phase 2 product candidate targeted for treating cancer patients with painful treatment-refractory chronic chemotherapy induced peripheral neuropathy (CCIPN).  KRN5500 has been designated a Fast Track Drug by the FDA and we have submitted an application for and are in the process of seeking orphan drug designation for this product.  Orphan drug designation provides extended market exclusivity, tax benefits, and the waiver of certain fees associated with the FDA approval process.  The Company is looking to partner the drug with an established oncology pharmaceutical development company to undertake and support further development costs.
 
As part of the Company’s strategic plan to focus on the commercialization of oncology treatment and oncology supportive care products, on June 17, 2013, the Company granted T3D Therapeutics, Inc. (T3D) the exclusive worldwide rights to develop and commercialize DB959, an oral, highly selective, dual PPAR (peroxisome proliferator activated receptor) nuclear receptor agonist, which it had 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, based upon an extension agreement of January 31, 2014, expects to be paid another $125,000 by February 21, 2014.  The Company used the initial $250,000 to pay off $250,000 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 milestone and annual payment to Bayer.
 
On October 25, 2013, the Company entered into an agreement with Alamo Pharma Services (“Alamo”) pursuant to which Alamo now provides the Company with a dedicated national sales team of 20 sales representatives to promote our commercial products. In addition, the Company signed an agreement, exclusive to the oncology market, with Mission Pharmacal (“Mission”), Alamo’s parent company, to share in the costs and expenses of the sales force.   The Alamo sales team, in addition to promoting the Company’s products Soltamox (tamoxifen citrate), Gelclair and Bionect, will also promote three Mission products: Ferralet® 90, Binosto® (alendronate sodium) and Aquoral®.  The agreements with Alamo and Mission expand the Company’s presence in oncology supportive care and the 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 January 2, 2014.  With the expansion of the sales force to 20 sales representatives, the Company expects its commercial costs , net of Mission support payments to Alamo to be significantly higher on an annualized basis.
 
The Company launched Soltamox in the U.S. in late October 2012 and subsequently launched its second product, Gelclair in April 2013. Since inception, the Company had been in the development stage as defined by FASB Accounting Standards (“ASC”), 915, Development Stage Entities. With the launch of Soltamox and the commencement of principal operations, the Company is no longer considered to be in the development stage and the financial statement presentation has been modified accordingly.  In the near-term, the Company’s ability to generate revenues is substantially dependent upon sales of Soltamox and Gelclair in the U.S. Based on the Company’s current operating plan, the Company believes that its existing cash, cash equivalents and marketable securities provides for sufficient resources to fund its currently planned operations through the first quarter of 2014.
 
The Company’s business is subject to significant risks consistent with specialty pharmaceutical and biotechnology companies that develop/distribute products for human therapeutic use. These risks include, but are not limited to, potential product liability, uncertainties regarding research and development, access to capital, obtaining and enforcing patents, receiving regulatory approval and competition with other biotechnology and pharmaceutical companies.
 
On January 17, 2012, the Company merged with Oncogenerix, Inc. (“Oncogenerix”)  as a result of which Oncogenerix became a wholly-owned subsidiary of DARA.  Oncogenerix was a specialty pharmaceutical company which was focused on the identification, development and commercialization of branded and generic oncology pharmaceutical products. Oncology treatment and oncology supportive care products and other product licensing opportunities, along with DARA's existing proprietary development pipeline, became the basis of the Company's long-term product portfolio.
 
For accounting purposes, the merger with Oncogenerix was accounted for under the acquisition method of accounting for business combinations in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC 805), Business Combinations.
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
42

 
 
Going Concern Considerations
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplated the realization of assets and the settlement of liabilities and commitments in the normal course of business.  However, as presented in the financial statements, as of December 31, 2013, the Company has a cash balance of approximately $3,426,000 and an accumulated deficit of $56,992,595. The Company also incurred a net loss of $10.3 million and negative cash flows from operations of $9.1 million in 2013. The Company has incurred significant net losses and has had negative cash flows from operations during each period from inception through December 31, 2013. Management expects operating losses and negative cash flows to continue into 2014.  As a result, there exists substantial doubt about the Company’s ability to continue as a going concern. The 2013 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.
 
The Company funded its 2013 operations primarily from net proceeds from equity securities issued totaling approximately $4,942,000 in 2013 and from net proceeds from the exercise of warrants totaling approximately $1,221,000 in 2013. The Company ended 2013 with cash and cash equivalents totaling approximately $3,426,000.   Management believes that, based upon its current operating plan, that such currently available funds, together with projected sales of Soltamox and Gelclair in 2014 will enable the Company to fund its planned operations and to meet its obligations through the first quarter of 2014.  These obligations over the next twelve months include, but are not limited to, lease commitments of approximately $168,000, anticipated fixed license obligations of approximately $125,000 and minimum sales force obligations of approximately $814,000.  The Company will need additional funds to meet its obligations and fund operations beyond that time.
 
On December 23, 2013, the Company filed with the SEC a Registration Statement on Form S-1 for a proposed public offering of up to $12.5 million of common stock (the “Proposed Offering”). The Company intends to work towards consummating the Proposed Offering during the first quarter of 2014. The exact terms of the Proposed Offering are not known, and the actual number of shares of common stock that the Company sells will depend on multiple factors, including market conditions and the market price of the Company’s common stock. Based on the current market price of the Company’s common stock, the Company does not have sufficient authorized and unreserved shares to sell the full $12.5 million being registered pursuant to the Registration Statement unless the Board effects a Reverse Stock Split, subject to shareholder approval which the Company is soliciting pursuant to its definitive proxy statement filed on December 24, 2014..  A Reverse Stock Split would create a decrease to the Company’s issued and outstanding shares and would provide the Company with sufficient authorized shares to sell the entire amount to be covered by the Registration Statement. If the proposal for a Reverse Stock Split is not approved by shareholders, and the Board therefore does not receive authorization to effect a Reverse Stock Split, the Company will not have sufficient shares available for issuance in order to raise the full $12.5 million in the Proposed Offering, and will need to either reduce the amount or pursue other financing alternatives, which may not be available to the Company or, if available, may not be available on favorable terms. Even if this proposal is approved and a Reverse Stock Split is effected, there can be no assurances that market conditions will permit the Company to sell $12.5 million or any other particular amount of common stock in the Proposed Offering. If for any reason the Company is not able to proceed with a capital raise on the terms set forth in the Registration Statement, it is likely that any alternative financing that the Company would pursue would require more authorized and unissued common stock than it currently has available.
 
There can be no assurance that any financing transaction, if commenced, will be completed or as to the value that any such transaction might have for our stockholders.
 
2.  Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of DARA BioSciences, Inc. and its majority-owned subsidiaries: DARA Pharmaceuticals, Inc., and Oncogenerix, Inc. (which are each wholly owned by the Company), and DARA Therapeutics, Inc. (which holds the Company’s assets related to its KRN5500 program and is owned 75% by the Company). The Company has control of all subsidiaries, and as such, they are all consolidated in the presentation of the consolidated financial statements. All significant intercompany transactions have been eliminated in the consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from those estimates.
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
43

 
 
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: 
 
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, 2013 and 2012, the Company had bank balances of $3,313,230 and $5,543,814, respectively, in excess of federally insured limits of $250,000 held in non-investment accounts.  In addition, our top four customers, OncoMed, Cardinal Health, McKesson Corporation, and Amerisource Bergen Corporation represented 90% of our gross trade accounts receivable as of December 31, 2013 and our top three customers, Cardinal Health, McKesson Corporation, and Amerisource Bergen Corporation represented 95% of our gross trade accounts receivable as of December 31, 2012.
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
44

 
 
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, 2013, the Company had an aggregate of $3.2 million in capitalized product rights, which it expects to amortize over remaining periods of approximately 4.5 to 8.7 years. As of December 31, 2012 the Company had an aggregate of $3.7 million in capitalized product rights (See Notes 3 and 7).

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 2013 or 2012.

The Company evaluates the recoverability of its intangible assets subject to amortization and other long-lived assets whenever events or changes in circumstances suggest that the carrying value of the asset or group of assets is not recoverable. The Company measures the recoverability of assets by comparing the carrying amount to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment charge equals the amount by which the carrying amount of the assets exceeds the fair value. Any write-downs are recorded as permanent reductions in the carrying amount of the assets.  There was no impairment to intangible assets recognized during 2013 or 2012.
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
45

 
 
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 beginning 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.
 
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 11 for further information.
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
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Comprehensive Loss
 
The Company’s comprehensive loss consists of net loss and other comprehensive income unrealized gains and losses on available-for-sale investments. The Company displays comprehensive income and its components as part of the consolidated statements of net loss and comprehensive loss and in its consolidated statements of shareholder equity.
 
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, 2013 and December 31, 2012 a valuation allowance has been recorded to reduce the net deferred tax asset to zero.
 
The Company's policy for recording interest and penalties is to record them as a component of interest income (expense), net.
 
Net Loss Per Common Share 
 
The Company calculates its basic loss per share in accordance with FASB ASC 260, Earnings Per Share, by dividing the earnings or loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period less the weighted average unvested common shares subject to forfeiture and without consideration for common stock equivalents. Diluted loss per share is computed by dividing the loss applicable to common stockholders by the weighted-average number of common share equivalents outstanding for the period less the weighted average unvested common shares subject to forfeiture and dilutive common stock equivalents for the period determined using the treasury-stock method.  For purposes of this calculation, in-the-money options and warrants to purchase common stock and convertible preferred stock are considered to be common stock equivalents but are not included in the calculation of diluted net loss per share for the years ended December 31, 2013 and 2012 as their effect is anti-dilutive. For the year ended December 31, 2013 there were no in-the-money common stock equivalents. For the year ended December 31, 2012, the following in-the-money common equivalents have been excluded from the calculation because their inclusion would be anti-dilutive: 1,460,526 common equivalents from the Series B-2 convertible preferred stock and 125,000 options.
 
   
Year ended December 31,
 
   
2013
   
2012
 
Net loss attributable to controlling interest
  $ (9,965,014 )   $ (7,311,033 )
                 
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