Item 1. Business
Overview
DARA BioSciences, Inc. is a specialty pharmaceutical company focused on the development and 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 treatment of breast cancer. We also have an exclusive distribution agreement with Uman Pharma Inc. to commercialize gemcitabine in the U.S. Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers. Additionally, we continue to have an internal clinical development program focused on two drug candidates, KRN5500 and DB959.
We were incorporated on June 22, 2002. Our executive offices are located at 8601 Six Forks Road, Suite 160, Raleigh, North Carolina 27615, and our telephone number is (919) 872-5578.
Product Commercialization and Development
Our primary focus is on the development and commercialization of the following types of oncology treatment and supportive care pharmaceutical products:
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Soltamox, an FDA-approved liquid formulation of tamoxifen and other liquid formulation products;
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Gemcitabine and other generic sterile injectable cytotoxic products; and
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Cancer support therapeutics.
As described below, we currently have an exclusive license to one FDA approved product, Soltamox, and an exclusive distribution agreement to commercialize gemcitabine in the U.S. We are working to build a portfolio of additional products through licenses and other collaborative arrangements.
Oral liquid formulations of FDA approved products
Oral liquids can effectively provide an attractive alternative to solid dose formulations for those patients with dysphagia, or difficulty swallowing, or who simply prefer to take drug products in liquid form. Dysphagia is a condition that exists in a portion of the population, particularly the elderly. 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 severe oral mucositis, which makes liquid medical formulations preferable.
Soltamox
Soltamox (oral liquid tamoxifen), our first proprietary, FDA approved product, is a drug primarily used to treat breast cancer. Soltamox will be the only liquid formulation of tamoxifen available for sale in the United States. As a result of our acquisition of Oncogenerix, we became party to an exclusive license and distribution agreement with Rosemont Pharmaceuticals, Ltd., a U.K. based manufacturer, for rights to market Soltamox in the United States. Currently, Soltamox is marketed only in the U.K. and Ireland by Rosemont Pharmaceuticals, Ltd. Soltamox is the subject of a U.S. issued patent which expires in June 2018. We expect to begin actively marketing and selling Soltamox in the U.S. in the second half of 2012.
Soltamox is used primarily for the chronic treatment of breast cancer or for cancer prevention in certain susceptible breast cancer subgroups. The National Cancer Institute (NCI) estimated in 2011 that 230,480 women would be diagnosed with breast cancer and 39,520 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 intend to establish a specialty commercial sales force which will market Soltamox to oncologists. Current physicians who prescribe tablet forms of tamoxifen in the United States are well known and easily identified by data sources such as IMS and Wolters Kluwer, providers of information services for the healthcare industry.
We will employ 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, 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.
Generic sterile injectable cytotoxic products
We are also focusing on the development and commercialization of generic sterile injectable cytotoxic products. Many cytotoxics have recently lost patent protection or are scheduled to shortly lose such patent protection. We plan to partner with sterile injectable product manufacturers who have the expertise and capability to provide a finished product from FDA inspected and approved facilities. Currently, the FDA review and approval process for generic products is taking on average approximately 36 months.
Gemcitabine
In February 2012, we entered into an Exclusive Distribution Agreement with Uman Pharma Inc. pursuant to which we received an exclusive license to import, sell, market and distribute Uman’s gemcitabine lyophilized powder product in 200mg and 1g dosage sizes in the U.S. Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers. Uman plans to file an Abbreviated New Drug Application for gemcitabine with the FDA in the second half of 2012.
Internal Development of Drug Candidates
We also are continuing the internal development program which was the primary focus of our business prior to the acquisition of Oncogenerix in January 2012. Presently, we have two lead drug candidates advancing through clinical development with cleared Investigational New Drug applications from the FDA:
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KRN5500, a novel, non-narcotic/non-opioid for the treatment of neuropathic pain in patients with cancer; and
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DB959, a first-in-class drug candidate for the treatment of type 2 diabetes and dyslipidemia.
KRN5500 is a novel, non-narcotic/non-opioid intravenous product for the treatment of neuropathic pain in patients with cancer. An active component of KRN5500 has been shown to inhibit nerve cell pain signals. The drug has successfully completed Phase 2a proof of concept studies in patients with end-stage cancer, meeting its primary endpoint of pain reduction using standardized scales. KRN5500 was also significantly superior to placebo in these studies (p=0.03) while having no major safety concerns. The FDA has designated KRN5500 a Fast Track Drug which is a program designed to facilitate the development and expedite the review of new drugs that are intended to treat serious or life threatening conditions and that demonstrate the potential to address the unmet medical need (Fast Track Drugs). The purpose of the FDA program is to get important drugs to the patient earlier. We have entered into a Clinical Trial Agreement with the National Cancer Institute (NCI) to perform a second Phase 2 study.
DB959 is a first-in-class small molecule drug candidate for the treatment of type 2 diabetes and dyslipidemia and has successfully completed Phase 1a and 1b studies. This compound activates genes involved in the metabolism of sugars and fats thereby improving the body’s ability to regulate both aspects of diabetes. Phase 1 clinical data demonstrated a good safety profile even when dosed at approximately 10 times the anticipated human dose and a pharmacokinetic profile supporting a once-a-day oral dose. Our review of non-clinical studies in models predictive of human disease indicates that this drug candidate provides glucose control and increases good HDL cholesterol and lowers triglycerides better than rosaglitazone (Avandia) with less weight gain. DB959 is targeted for out-licensing to partners more able to sustain the prolonged time-lines and significant costs involved in diabetes drug development.
In addition, we have three pre-clinical drug candidate programs available for future development and monetization:
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DB900 PPAR gamma/alpha/delta agonists with potential for development in metabolic or inflammatory diseases as well as selected additional indications;
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DB160, DPPIV enzyme inhibitors with potential applications in diabetes, stem cell transplantation and cancer therapy; and
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DB200, Carnitine palmitoyltransferase-1 enzyme inhibitors with potential applications for skin diseases including psoriasis.
Since KRN5500 would complement the portfolio of oncology treatment and supportive care pharmaceutical products we are seeking to build, we may elect to complete its development internally and then commercialize it. However, in general, we do not intend to fully develop, obtain clearance from the FDA or market the drug candidates we are internally developing. Instead, we seek to develop these candidates through proof of concept in patients (generally through Phase 2a clinical trials) and then license or sell the candidate or find a strategic collaborative partner who would further the development of the compound in later stage trials and commercialize it after regulatory approval.
In our internal development program, we contract with and manage outsource partners to complete the necessary development work. This permits us to avoid incurring the cost of buying or building laboratories, manufacturing facilities or clinical research operation sites and allows us to control our annual expenses and to optimize our resources.
Investments
Prior to our merger with Point Therapeutics, Inc. in February 2008, we made investments in several companies. We currently hold an investment in MRI Interventions, Inc., formerly known as SurgiVision. MRI Interventions, a privately-held company, has developed “real-time” Visual Functional MRI Technology. The company is targeting clinical solutions in two areas: MRI-Guided Deep Brain Stimulation (DBS) and Cardiac Ablation to treat Atrial Fibrillation
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 inlicense and market products will be an important element of market success. Other significant competitive factors include:
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product safety and efficacy;
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timing and scope of regulatory approval;
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product availability;
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marketing and sales capabilities;
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reimbursement coverage from insurance companies and others;
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the extent of clinical benefits and side effects of our products relative to their cost;
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price;
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patent protection; and
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capabilities of partners with whom we may collaborate.
Intellectual Property
Patent Portfolio
Presently, we have rights to 83 issued US and foreign patents and 41 pending patent applications. Our patents have varying expiration dates, with some expiring as early as July 2012. Our patent rights categorized by individual drug development programs are summarized below.
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KRN5500 - six issued U.S. patents and corresponding foreign patents, related to spicamycin and derivatives and analogs thereof (including KRN5500) and use of the same for treating pain; and one pending U.S. and corresponding foreign applications related to formulations of KRN5500.
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DB959 and DB900 - eight issued U.S. patents and four pending U.S. patent applications 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.
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DB160 - one U.S. patent with corresponding foreign patents and pending patent applications related to DB160 and derivatives and analogs thereof and use of the same for treating type 2 diabetes and other diseases.
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DB200 - two pending U.S. patent applications with corresponding foreign patent applications related to DB200 and derivatives and analogs thereof, methods of making the same, and use of the same for treating dermatological conditions (including psoriasis) and other disorders.
For information concerning the license agreements relating to these patents, see “Licenses” below.
We decided to allow patents and patent applications relating to technologies developed by Point Therapeutics, Inc. to lapse, as we determined that further development of talabostat or related compounds is not of interest to DARA or other parties. This reduces our costs for our patent portfolio and allows us to use our capital to support the intellectual property for our active development programs and those programs which we believe contain future value and benefit to the company.
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.
We hold an exclusive license to import, sell, market and distribute Uman Pharma Inc.’s gemcitabine lyophilized powder product in 200mg and 1g dosage sizes in the United States. We acquired this license on February 9, 2012.
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 for the treatment of pain and central and peripheral nervous system conditions or diseases. 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 acting as DPP-IV inhibitors for the treatment of type 2 diabetes and other metabolic diseases from Nuada, LLC. This license was acquired December 22, 2006.
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.
We ended our license agreement with Tufts University this year. This license had previously granted exclusive worldwide rights to compounds, including talabostat. This action was a cost-saving measure after our decision that further development of talabostat or related compounds was not of interest to DARA or other parties.
Governmental Regulation
The advertising, marketing and distribution of approved prescription pharmaceutical products in the United States is subject to the United States Food, Drug and Cosmetic Act, as amended, (FDCA) which regulates the labeling, advertising, marketing, distribution and recordkeeping requirements for drugs and drug samples , and sets standards for the manufacture, storage, distribution, registration and regulation of drug distributors. Both the FDCA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.
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, 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.
Research and Development Activities
Research and development costs associated with our products and technologies, as well as facilities costs, personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. Research and development costs include personnel costs, patent costs, clinical and related drug manufacturing and testing costs, laboratory and animal supplies, outside services and contract laboratory costs. 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 8 full-time employees and one part-time employee.
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 Investor Relations department at our corporate headquarters.
Item 1A.
Item 1A. Risk Factors.
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.
We expect to continue to incur losses.
We have incurred losses since inception and expect to continue to incur losses for the foreseeable future. Our losses are likely to be primarily attributable to personnel costs, working capital costs, marketing costs, research and development costs and regulatory approval costs as well as the costs associated with in-licensing of our products. We may never achieve sustained profitability.
We will need additional financing.
We will need additional financing 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. 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. In the event that 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:
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begin marketing and sales efforts with respect to Soltamox or any other products;
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successfully build a portfolio of additional products for commercialization;
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continue the development of our active drug development programs;
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resume development of any of our currently delayed drug development programs;
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successfully out-license, otherwise monetize or commercialize any of our programs; or
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continue operations.
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:
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our inability to raise additional capital to fund our operations, whether through the issuance of equity securities or debt;
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our failure to successfully commercialize products we license for commercial sale;
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our failure to successfully advance the development of our programs or otherwise implement our business objectives;
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changes in our intellectual property portfolio or developments or disputes concerning the proprietary rights of our product candidates;
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our ability to successfully enter into and maintain manufacturing relationships for our products;
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progress or results of any of our clinical trials;
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progress of regulatory approval of our product candidates and compliance with ongoing regulatory requirements;
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market acceptance of our products;
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technological innovations, new commercial products or drug discovery efforts and preclinical and clinical activities by us or our competitors;
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changes in government regulations;
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issuance of new or changed securities analysts’ reports or recommendations;
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general economic conditions and other external factors;
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actual or anticipated fluctuations in our quarterly financial and operating results;
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the degree of trading liquidity in our common stock; and
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our ability to meet the minimum standards required for remaining listed on the NASDAQ Capital Market.
A significant number of shares of our common stock are issuable pursuant to outstanding shares of convertible preferred stock, options and warrants, and we expect to sell additional shares of our common stock in the future. Sales of these shares will dilute the interests of other security holders and may depress the price of our common stock.
As of February 12, 2012, we had 7,043,233 shares of common stock outstanding. As of February 12, 2012, there were 331,200 shares of common stock issuable upon the conversion of outstanding shares of Series A preferred stock, 910,747 shares of common stock issuable upon the conversion of outstanding shares of Series B preferred stock, 3,046,581 shares of common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $5.80 per share, 1,028,848 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $3.05 per share, 86,421 shares of common stock reserved for future grants and awards under our equity incentive plans and 1,114,560 shares of common stock reserved for issuance to former Oncogenerix, Inc. stockholders, subject to stockholder approval and based upon our achievement of certain revenue or market capitalization milestones during the five year period ending January
2017. In addition, we may issue additional common stock and warrants 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.
Our business depends on successful license and other collaborative arrangements.
Our business strategy requires us to inlicense products for commercialization, enter into collaborative agreements with drug manufacturers and outlicense or sell our internally developed drug candidates that have reached a certain level of clinical development. 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.
The success of any 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 may not generate material product revenues and we may 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:
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the prevalence and severity of any side effects;
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the efficacy and potential advantages of alternative treatments;
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the prices of our product candidates;
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the willingness of physicians to prescribe our products; and
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sufficient third-party coverage or reimbursement.
Commercialization of a new product, including Soltamox, 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 associates with drug development generally.
Commercialization of a new product, including Soltamox, 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:
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the products, even if safe and effective, may be difficult to manufacture on a large scale or uneconomical to market;
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proprietary rights of third parties may prevent us from exploiting technologies or marketing products; and
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third parties may market superior or equivalent products.
Our ability to commercialize our products will depend on our ability to:
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complete any necessary studies;
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obtain and maintain necessary intellectual property rights to our products;
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obtain and maintain necessary regulatory approvals related to the efficacy and safety of our products;
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enter into arrangements with manufacturers to provide manufacturing resources; and
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establish marketing and sales channels.
We may not be successful in some or all of these initiatives.
We cannot guarantee that we will be able to effectively market our potential products.
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 we have never attempted to commercialize any product. We are in the early stages of building our sales and marketing strategy and organization. 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 product’s prospects will be harmed.
We anticipate that initially a relatively small group of products that we commercialize directly will represent a significant portion of net revenues. If the volume or pricing of any of these products declines, or we are unable to satisfy market demand for these products, it 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, and our stock price could decline.
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 these products, or these products, when 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 timely and cost-effective manner. In addition, the acquisition, development and commercialization of new products is characterized by significant up-front costs, including costs associated with product development, obtaining regulatory approval, building inventory and sales and marketing. Furthermore, the development and commercialization of new products is subject to inherent risks, including the possibility that any new product may:
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fail to receive or encounter unexpected delays in obtaining necessary regulatory approvals;
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be difficult or impossible to manufacture on a larger scale;
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be uneconomical to market;
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fail to be developed prior to the successful marketing of similar or superior products by third parties; and
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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 plan to rely on third parties for the manufacture of our potential 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 currently do not intend to manufacture any products ourselves. Instead, we plan 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.
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 or other licensors for any reason would have a material adverse effect on our business.
Soltamox (oral liquid tamoxifen), 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.
The drug candidates we are developing are at early stages of development, and we may not be able to successfully develop these drug candidates into commercially viable drugs.
The drug development process is highly uncertain, and we have not developed and may never develop a drug candidate that ultimately leads to a commercially viable drug. Our two most advanced drug candidates are in the early stages of development and have not been approved for commercial sale. Before a drug product is approved by the FDA for commercial marketing, it must be tested for safety and effectiveness in clinical trials that can take many years. Promising results in preclinical development or early clinical trials may not be predictive of results obtained in later clinical trials. 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 candidates from being successfully commercialized, including:
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failure to achieve clinical trial results that indicate a product candidate is effective in treating a specified condition or illness in humans;
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safety issues, including the presence of harmful side effects;
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determination by the FDA that the submitted data do not satisfy the criteria for approval;
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new information that suggests lack of commercial viability of the drug;
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failure to acquire, on reasonable terms, intellectual property rights necessary for commercialization; and
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development of competing therapeutics that are more effective.
Our success depends on our ability to retain our managerial personnel and to attract additional personnel (including a sales force).
Our success depends largely on our ability to attract and retain managerial personnel. Competition for desirable personnel is intense, and there can be no assurance that we will be able to attract and retain the necessary staff. We currently have eight full-time employees and currently lack sales personnel necessary to commercialize products in accordance with our business plan. The loss of one or more members of managerial or scientific staff could have a material adverse effect on our future operations and on successful development of products for our target markets. The failure to maintain management, particularly our President and Chief Executive Officer and our 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 pharmaceutical and biotechnology industries are intensely competitive and we may be unable to successfully compete against competitors with substantially more resources than we have.
In general, the pharmaceutical and biotechnology industries are intensely competitive. The technological areas in which we work continue to evolve at a rapid pace. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and we expect it to increase. Many of these competitors are substantially larger than we are and have substantially greater capital resources, research and development capabilities and experience, manufacturing, marketing, financial and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance the financial, marketing and other resources available to these competitors.
An important factor in our ability to compete will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can inlicense 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:
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product safety and efficacy;
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timing and scope of regulatory approval;
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product availability;
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marketing and sales capabilities;
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reimbursement coverage from insurance companies and others;
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the extent of clinical benefits and side effects of our products relative to their cost;
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price;
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patent protection; and
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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.
The success of our business depends on our ability to develop and protect our intellectual property rights, which could be expensive.
Our success depends to a significant extent on our ability to obtain patent protection on technologies and products and preserve trade secrets and to operate without infringing the proprietary rights of others. There can be no assurance that any patent applications or patents we are able to license will afford any competitive advantages or will not be challenged or circumvented by third parties. Furthermore, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed or licensed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that before any of our potential products can be commercialized, any related patent may expire, or remain in existence for only a short period following commercialization, thus reducing any advantage of the patent. Further, important legal issues remain to be resolved as to the extent and scope of available patent protection for biotechnology products and processes in the U.S. and other important markets outside the U.S., such as Europe and Japan. Foreign markets may not provide the same level of patent protection as provided under the U.S. patent system. In addition, changes in, or different interpretations of, patent laws in the U.S. and other countries may result in patent laws that allow others to take advantage of our discoveries or develop and commercialize our products. We cannot assure you that the patents we obtain or the unpatented technology we hold will afford us significant commercial protection.
We also rely on trademarks, copyrights, trade secrets and know-how to develop, maintain and strengthen our competitive positions. While we take steps to protect our proprietary rights to the extent possible, 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 future operations may be subject to claims, and potential litigation, arising from our alleged infringement of patents, trade secrets or copyrights owned by other 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.
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 certain foreign markets, pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. 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. 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 most of our intended products are subject to an extensive regulatory approval process by the FDA and other regulatory agencies in the U.S. and abroad, such as in Europe 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 two drug candidates in development. A delay or setback in the clinical development of either of these candidates would likely have a material adverse effect on our business, financial condition and results of operations.
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 our proposed products 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 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 or 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 market our products in a manner that violates healthcare fraud and abuse laws, or if we violate false claims laws or fail to comply with our reporting and payment obligations under the Medicaid rebate program or other governmental pricing programs, we may be subject to civil or criminal penalties or additional reimbursement requirements and sanctions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
In addition to FDA restrictions on the marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include anti-kickback statutes and false claims statutes. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws.
The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the
purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federally financed healthcare program. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions
and safe harbors are drawn narrowly and practices that involve remuneration intended to induce prescribing, purchasing or recommending such healthcare items or services may be subject to scrutiny if they do not qualify for an exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement in order to have a claim paid. Pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers, reporting inflated average wholesale prices to pricing services that were then used by federal programs to set reimbursement rates and engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered, off-label uses. Such activities have been alleged to cause the resulting claims for reimbursement to be “false” claims. Most states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer.
We anticipate that we will participate 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 other future products we may commercialize. 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 PPACA, 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 anticipated activities conducted by our sales team in the sale of Soltamox, 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.
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.
We may not achieve the benefits we expect from our acquisition of Oncogenerix, Inc., which may have a material adverse effect on the combined company’s business, financial, and operating results.
We consummated the acquisition of Oncogenerix with the expectation that the transaction will result in benefits to the combined company. Post-transaction challenges include the following:
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successfully combining the operations of both companies;
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potentially higher than expected costs required to achieve the anticipated benefits of the acquisition; and
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retaining and integrating management and employees.
If the combined company is not successful in addressing these and other challenges, then the benefits of the acquisition may not be realized and, as a result, the combined company’s operating results and the market price of our common stock may be adversely affected.
If we fail to satisfy applicable listing standards, including maintenance of at least $2.5 million of stockholders’ equity, our common stock may be delisted from the NASDAQ Capital Market.
Our common stock is currently traded on the Nasdaq Capital Market. The Nasdaq Capital Market imposes, among other requirements, listing maintenance standards including minimum bid price and stockholders’ equity requirements. In particular, Nasdaq rules require us to maintain a minimum stockholders’ equity of $2,500,000. On November 17, 2011, we received a notification letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC notifying us that, based on our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, we no longer maintained the minimum $2.5 million stockholders’ equity required for continued listing on The Nasdaq Capital Market under Marketplace Rule 5550(b)(1) (the “Minimum Stockholders’ Equity Rule”). We appealed the determination and on February 6, 2012 the Panel granted our request to remain listed on The Nasdaq Capital Market, subject to the following conditions: on or before April 18, 2012 we must (1) publicly announce on Form 8-K the closing of an equity offering and that the proceeds from the offering have enabled us to regain compliance with the Minimum Stockholders’ Equity Rule, and (2) provide the Panel with pro forma projections showing continued compliance with the Minimum Stockholders’ Equity Rule through 2013. In addition, we are subject to a Panel Monitor pursuant to Marketplace Rule 5815(d)(4)(A) through April 2013. During the monitor period, we are required to notify the Panel in the event our stockholders’ equity falls below $2.5 million or if we fall out of compliance with any other applicable listing requirement. If at any time before April 15, 2013, our stockholders’ equity falls below $2.5 million and we do not qualify for listing under an alternative to the Minimum Stockholders’ Equity Rule, the Panel will promptly conduct a hearing with respect to this deficiency, and our common stock may be immediately delisted from The Nasdaq Stock Market.
We believe that as a result of our acquisition of Oncogenerix as well as the completion of the registered direct transaction described in the Current Report on Form 8-K filed by us with the SEC on January 18, 2012 we will be able to report on Form 8-K that we have regained compliance with the Minimum Stockholders’ Equity Rule. We also intend to provide the Panel with a business plan, including pro forma projections, showing continued
compliance with the Minimum Stockholders’ Equity Rule through 2013. However, there are no assurances that the Panel will accept our plan, and even if it does, we may fail to perform according to the plan or otherwise fail to remain in compliance with applicable listing requirement. In either case, our common stock may be delisted from The Nasdaq Capital Market.
If our common stock were delisted from NASDAQ, among other things, it could lead to a number of negative implications, including reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing.
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.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
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, 2013.
Item 3.
Item 3. Legal Proceedings.
As of February 17, 2012, we had no outstanding material legal proceedings.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
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, as adjusted for the one-for-sixteen reverse stock split which occurred on May 12, 2010.
Stockholders
Our transfer Agent is American Stock Transfer and Trust Company. On February 15, 2012, the last reported sale price of our common stock on The Nasdaq Capital Market was $2.37 per share. On February 15, 2012, there were approximately 182 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.
Recent Sales of Unregistered Securities
In December 2011, we granted warrants to purchase a total of 200,000 shares of our common stock to two individuals. These warrants have ten year terms and an exercise price of $1.31.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
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 specialty pharmaceutical company focused on the development and 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 treatment of breast cancer and is currently sold in the UK and Ireland by Rosemont Pharmaceuticals, Ltd. We also have an exclusive distribution agreement with Uman Pharma Inc. to commercialize gemcitabine in the U.S. Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers. Additionally, we continue to have an internal clinical development program focused on two drug candidates, KRN5500 and DB959.
We have not generated any revenue from operations to date. We have liquidated or distributed to our stockholders most 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 sale of securities held in subsidiary companies and marketable securities. From inception through December 31, 2011, we raised a total of $37,704,083 in proceeds from issuance of preferred and common stock, net of issuance costs. From inception through December 31, 2011, we received net proceeds from the sale of securities held in subsidiary companies and marketable securities of $4,405,692 and $1,951,211, respectively
We expect to continue to incur operating losses in the near-term. Our results may vary depending on many factors, including the success of our product marketing efforts, the progress of licensing activities with pharmaceutical partners and clinical test results.
Product Commercialization
Our primary focus is on the development and commercialization of the following types of oncology treatment and supportive care pharmaceutical products:
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Soltamox, an FDA-approved liquid formulation of tamoxifen and other liquid formulation products;
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Gemcitabine and other generic sterile injectable cytotoxic products; and
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Cancer support therapeutics.
We currently have an exclusive license to one FDA approved product, Soltamox, and an exclusive distribution agreement to commercialize gemcitabine in the U.S. We are working to build a portfolio of additional products through licenses and other collaborative arrangements.
Soltamox (oral liquid tamoxifen), our first proprietary, FDA approved product, is a drug primarily used to treat breast cancer. Soltamox will be the only liquid formulation of tamoxifen available for sale in the United States. As a result of our acquisition of Oncogenerix, we became party to an exclusive license and distribution agreement with Rosemont Pharmaceuticals, Ltd., a U.K. based manufacturer, for rights to market Soltamox in the United States. Currently, Soltamox is marketed only in the U.K. and Ireland. Soltamox is the subject of a U.S. issued patent which expires in June, 2018. We expect to begin actively marketing and selling Soltamox in the U.S. in the second half of 2012.
We are also focusing on the development and commercialization of generic sterile injectable cytotoxic products. Many cytotoxics have recently lost patent protection or are scheduled to shortly lose such patent protection. We plan to partner with sterile injectable product manufacturers who have the expertise and capability to provide a finished product from FDA inspected and approved facilities. Currently, the FDA review and approval process for generic products is taking on average approximately 36 months. In February 2012, we entered into an Exclusive
Distribution Agreement with Uman Pharma Inc. pursuant to which we received an exclusive license to import, sell, market and distribute Uman’s gemcitabine lyophilized powder product in 200mg and 1g dosage sizes in the U.S. Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers. Uman plans to file an Abbreviated New Drug Application for gemcitabine with the FDA in the second half of 2012.
We also are continuing the internal development program which was the primary focus of our business prior to the acquisition of Oncogenerix in January 2012. Presently, we have two lead drug candidates advancing through clinical development with cleared Investigational New Drug applications from the FDA:
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KRN5500, a novel, non-narcotic/non-opioid for the treatment of neuropathic pain in patients with cancer; and
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DB959, a first-in-class drug candidate for the treatment of type 2 diabetes and dyslipidemia.
In addition, we have three pre-clinical drug candidate programs available for future development and monetization:
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DB900, PPAR gamma/alpha/delta agonists with potential for development in metabolic or inflammatory diseases as well as selected additional indications;
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DB160, DPPIV enzyme inhibitors with potential applications in diabetes, stem cell transplantation and cancer therapy; and
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DB200, Carnitine palmitoyltransferase-1 enzyme inhibitors with potential applications for skin diseases including psoriasis.
Status of our Drug Candidates
KRN5500
KRN5500 is a novel, non-narcotic/non-opioid intravenous product for the treatment of neuropathic pain in patients with cancer. The drug has successfully completed Phase 2a proof of concept studies in patients with end-stage cancer, meeting its primary endpoint of pain reduction using standardized scales. KRN5500 was also significantly superior to placebo in these studies (p=0.03) while having no major safety concerns. The FDA has designated KRN5500 a Fast Track Drug. We have entered into a Clinical Trial Agreement with the National Cancer Institute (NCI) to perform a second Phase 2 study. Since KRN5500 would complement the portfolio of oncology treatment and supportive care pharmaceutical products we are seeking to build, we may elect to complete its development internally and then commercialize it.
We incurred $541,791 in costs associated with the development of KRN5500 during 2011, and we have incurred costs of $4,773,215 from inception to date. We estimate the market potential for chemotherapy-induced peripheral neuropathy (CIPN) to be roughly $2.5 billion.
DB959
DB959 is a first-in-class small molecule drug candidate for the treatment of type 2 diabetes and dyslipidemia and has successfully completed Phase 1a and 1b studies. This compound activates genes involved in the metabolism of sugars and fats thereby improving the body’s ability to regulate both aspects of diabetes. Phase 1 clinical data demonstrated a good safety profile even when dosed at approximately 10 times the anticipated human dose and a pharmacokinetic profile supporting a once-a-day oral dose. Our review of non-clinical studies in models predictive of human disease indicates that this drug candidate provides glucose control and increases good HDL cholesterol and lowers triglycerides better than rosaglitazone (Avandia) with less weight gain. DB959 is targeted for out-licensing to partners more able to sustain the prolonged time-lines and significant costs involved in diabetes drug development.
We incurred $1,391,197 in direct outside development costs associated with the development of DB959 during 2011, and we have incurred costs of $7,446,678 from inception to date.
Pre-clinical Drug Candidate Programs Available for Future Development
DB900 comprises a series of compounds which are PPAR gamma/alpha/delta agonists. We did not incur costs in 2011 for the development of DB900 series compounds; we have incurred costs of $129,272 from inception to date.
DB160 is a dipeptidylpeptidase (DPPIV) inhibitor for the treatment of type 2 diabetes. We incurred $42,979 in direct outside development costs associated with the development of DB160 during 2011, and we have incurred costs of $2,374,837 from inception to date.
DB200 refers to a series of compounds that are inhibitors of the enzyme, carnitine palmitoyl transferase (CPT-1). We incurred $46,258 of patent costs for the development of DB200 series compounds during 2011; we have incurred costs of $427,540 from inception to date.
We had previously determined that further development of talabostat, a drug formerly studied at Point Therapeutics for the treatment of cancer, is not warranted. We have now determined that it is unlikely that any future uses for this drug will be identified, and as such, have terminated the license agreement under which we licensed talabostat from Tufts University School of Medicine and ceased maintaining the patent estate. We incurred $33,552 in direct costs associated with talabostat during 2011, and we have incurred costs of $141,443 from inception to date.
Critical Accounting Policies and Significant Judgments and Estimates
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.
Research and Development Expenses
We expense research and development expenses when incurred. The cost of certain research programs, such as patient recruitment and related supporting functions for clinical trials, are based on reports and invoices submitted by the contract research organization (“CRO”) assisting us in conducting the clinical trial. These expenses are based on patient enrollment as well as costs consisting primarily of payments made to the CRO, clinical centers, investigators, testing facilities and patients for participating in our clinical trials. Certain research and development costs must be prepaid which, if the research and development work ceases to progress for whatever reason, are not refundable to us. In such cases, those costs are expensed when paid.
Accrued Expenses
As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when invoices have not yet been sent and we have not otherwise been notified of actual cost. The majority of our service providers invoice monthly in arrears for services performed. We make estimates of accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued expenses include:
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fees paid to CROs in connection with preclinical and toxicology studies and clinical trials;
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fees paid to investigative sites in connection with clinical trials;
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fees paid to contract manufacturers in connection with the production of raw materials, drug substance and drug products; and
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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 (formerly referred to as SFAS 123R) (“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 the Company’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. Please refer to Note 10 - 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
Research and development expenses decreased from $3,342,768 for the year ended December 31, 2010 to $2,633,449 for the year ended December 31, 2011, primarily as a result of less clinical trial costs for the Phase 1b clinical development of DB959 compared to Phase 1a in 2010; and the formulation of a placebo for the NCI Study for KRN5500 in 2011 compared to the reformulation of the drug product during 2010.
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 allocated facility, basic operational and support costs and insurance costs. General and administrative expenses increased from $3,141,987 in 2010 to $4,128,446 in 2011, due to an increase in investor relation fees, share based payments to the Chief Executive Officer and Board members, and payroll associated expenses.
Other income (expense), net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations. Other income, net decreased from income of $492,856 in 2010 to $90,200 in 2011. This decrease was primarily due to $488,958 of grants received in 2010 for our DB959 and KRN5500 programs from the Internal Revenue Service under the Patient Protection and Affordable Care Act of 2010 offset by $85,277 benefit to accrued interest from the recognition of previously unrecognized state tax benefits of $194,445 in 2011.
Liquidity and Capital Resources
Overview
From inception through December 31, 2011, we have financed our operations primarily from the net proceeds of (1) registered direct offerings and private placements of equity securities, through which we raised $37,704,083 in net proceeds and (2) the sale of securities held in subsidiary companies and marketable securities, through which we raised $4,405,692 and $1,951,211, respectively.
At December 31, 2011, our principal sources of liquidity were our cash and cash equivalents which totaled $1,179,157. As of December 31, 2011, we had net working capital of $594,871.
Our cash resources have been used to acquire licenses and to fund research and development activities, capital expenditures and general and administrative expenses.
We have incurred significant net losses and have had negative cash flows from operations during each period from inception through December 31, 2011 and have a deficit accumulated during the development stage of $39,497,201 at December 31, 2011. Management expects operating losses and negative cash flows to continue through 2012 and the foreseeable future.
Cash Flows
During 2011, our cash and cash equivalents decreased by $4,299,257 from December 31, 2010.
Our operating activities used net cash of $4,860,806 for the year ended December 31, 2011 primarily to fund our net loss of $6,477,250 offset in part by non-cash stock-based compensation of $1,676,734 and depreciation expenses of $139,392. Prepaid expenses increased by $137,699 during the year ended December 31, 2011, primarily as a result of a prepayment to a CRO for the KRN5500 program. Accounts payable increased by $291,076 and accrued expenses decreased by $347,290. Other liability decreased by $279,722 primarily due to the result of the benefit of $85,277 to accrued interest and $194,445 from the recognition of previously unrecognized state tax liability.
Our investing activities were zero for the year ended December 31, 2011.
Our financing activities provided net cash of $561,549 for the year ended December 31, 2011 primarily as a result of net cash from the exercise of 60,000 Series A Class A warrants and 165,000 Series A Class B warrants during 2011.
Financial Condition
We believe we have sufficient working capital to pursue our current limited operations through the end of the first six months of 2012. We will require additional funds to pursue our business plan. Our working capital requirements will depend upon numerous factors including the substantial costs we expect to incur building a
portfolio of pharmaceutical products and a sales force to commercialize such products, costs incurred in connection with our internal drug development program and our ability to sell or license these technologies to third parties. In any event, we will 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 are currently exploring 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 outlicensing 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 are unable to obtain such needed capital, we may not be able to:
•
begin marketing and sales efforts with respect to Soltamox or any other products;
•
successfully build a portfolio of additional products for commercialization;
•
continue the development of our active drug development programs;
•
resume development of any of our currently delayed drug development programs;
•
successfully out-license, otherwise monetize or commercialize any of our programs; or
•
continue operations.
Nasdaq Capital Market Listing
Our common stock is currently traded on the Nasdaq Capital Market. The Nasdaq Capital Market imposes, among other requirements, listing maintenance standards including minimum bid price and stockholders’ equity requirements. In particular, Nasdaq rules require us to maintain a minimum stockholders’ equity of $2,500,000. On November 17, 2011, we received a notification letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC notifying us that, based on our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, we no longer maintained the minimum $2.5 million stockholders’ equity required for continued listing on The Nasdaq Capital Market under Marketplace Rule 5550(b)(1) (the “Minimum Stockholders’ Equity Rule”). We appealed the determination and on February 6, 2012 the Panel granted our request to remain listed on The Nasdaq Capital Market, subject to the following conditions: on or before April 18, 2012 we must (1) publicly announce on Form 8-K the closing of an equity offering and that the proceeds from the offering have enabled us to regain compliance with the Minimum Stockholders’ Equity Rule, and (2) provide the Panel with pro forma projections showing continued compliance with the Minimum Stockholders’ Equity Rule through 2013. In addition, we are subject to a Panel Monitor pursuant to Marketplace Rule 5815(d)(4)(A) through April 2013. During the monitor period, we are required to notify the Panel in the event our stockholders’ equity falls below $2.5 million or if we fall out of compliance with any other applicable listing requirement. If at any time before April 15, 2013, our stockholders’ equity falls below $2.5 million and we do not qualify for listing under an alternative to the Minimum Stockholders’ Equity Rule, the Panel will promptly conduct a hearing with respect to this deficiency, and our common stock may be immediately delisted from The Nasdaq Stock Market.
We believe that as a result of our acquisition of Oncogenerix as well as the completion of the registered direct transaction described in the Current Report on Form 8-K filed by us with the SEC on January 18, 2012 we will be able to report on Form 8-K that we have regained compliance with the Minimum Stockholders’ Equity Rule. We also intend to provide the Panel with a business plan, including pro forma projections, showing continued compliance with the Minimum Stockholders’ Equity Rule through 2013. However, there are no assurances that the Panel will accept our plan, and even if it does, we may fail to perform according to the plan or otherwise fail to remain in compliance with applicable listing requirement. In either case, our common stock may be delisted from The Nasdaq Capital Market.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2011.
Recently Issue Accounting Pronouncements
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 31, 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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
DARA BioSciences, Inc.
(A Development Stage Company)
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of DARA BioSciences, Inc.
We have audited the accompanying consolidated balance sheets of DARA BioSciences, Inc. and subsidiaries, as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2011 and for the period from June 22, 2002 (date of inception) through December 31, 2011. 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. We were not engaged to perform an audit of the Company’s 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DARA BioSciences, Inc. and subsidiaries, at December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2011 and for the period from June 22, 2002 (date of inception) through December 31, 2011, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that DARA BioSciences, Inc. will continue as a going concern. As more fully described in Note 1, DARA has incurred recurring operating losses since inception which has resulted in insufficient working capital. These conditions raise substantial doubt about DARA’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The December 31, 2011 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 the outcome of this uncertainty.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 17, 2012
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
The accompanying notes are an integral part of these consolidated financial statements.
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
The accompanying notes are an integral part of these consolidated financial statements.
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
The accompanying notes are an integral part of these consolidated financial statements.
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
The accompanying notes are an integral part of these consolidated financial statements.
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
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 development and commercialization of oncology treatment and supportive care pharmaceutical products. Through our acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, we acquired our first commercial proprietary product, Soltamox® (oral liquid tamoxifen). Additionally, we continue to have an internal clinical development program focused on two drug candidates KRN5500 and DB959. The Company was incorporated on June 22, 2002.
The activities of the Company have primarily consisted of establishing offices, recruiting personnel, conducting research and development, performing business and financial planning and raising capital. Accordingly, the Company is considered to be a biopharmaceutical development stage company. The Company has incurred losses since inception through December 31, 2011 of $39,497,201 and expects to continue to incur losses and require additional financial resources to achieve monetization of its product candidates.
On February 12, 2008, the Company, formerly known as Point Therapeutics, Inc. (the “Company”), completed the merger transaction (the “Merger”) contemplated by the Agreement and Plan of Merger dated October 9, 2007, as amended December 19, 2007 (the “Merger Agreement”), among the Company, DP Acquisition Corp., a wholly-owned subsidiary of the Company (“Merger Sub”), and DARA BioSciences, Inc., a privately held development stage pharmaceutical company based in Raleigh, North Carolina (“DARA”). Pursuant to the Merger, each share of DARA common stock and preferred stock issued and outstanding immediately prior to the effective time of the Merger ceased to be outstanding and was converted into the right to receive 1.031406 shares of Company common stock, plus cash in lieu of any fractional shares. As a result of the transaction, the former DARA stockholders received 96.4% of the Company’s outstanding shares of common stock on a fully-diluted basis and Merger Sub merged with and into DARA, with DARA surviving as a wholly-owned subsidiary of the Company. Upon consummation of the Merger, the Company changed its name to DARA BioSciences, Inc.
For accounting purposes, the Merger was treated as a reverse acquisition with DARA being the accounting acquirer. Accordingly, the historical financial information in these financial statements prior to the Merger is that of DARA and its consolidated subsidiaries and all references to the “Company” in these financial statements relating to periods prior to the Merger refer to DARA (see Note 3).
On May 12, 2010, the Company effected a reverse stock split of the Company’s common stock. Pursuant to this reverse stock split, each 16 shares of the Company’s common stock issued and outstanding immediately prior to the reverse stock split was converted into one share of the Company’s common stock. The reverse stock split enabled the Company to regain compliance with the minimum $1.00 per share bid price requirement for continued listing of the Company’s common stock on The NASDAQ Capital Market. All share or per share information included in these Notes to Consolidated Financial Statements and the audited Consolidated Financial Statements have been retroactively restated to effect the reverse stock split.
Going Concern
The Company has incurred significant net losses and has had negative cash flows from operations during each period from inception through December 31, 2011 and has a deficit accumulated during the development stage of approximately $39,716,548 at December 31, 2011. Management expects operating losses and negative cash flows to continue into 2012.
At December 31, 2011, management believes that currently available cash and cash equivalents together with existing financing agreements would provide sufficient funds to enable the Company to meet its obligations
through June of 2012. Through the Company’s acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, it acquired the exclusive U.S. marketing rights to its first commercial proprietary product, Soltamox (oral liquid tamoxifen). Soltamox has been approved by the U.S. Food and Drug Administration (“FDA”) for the treatment of breast cancer. The Company expects to begin generating revenues in the latter half of 2012. Management plans to continue to finance the Company’s operations with a combination of new equity issuances and debt arrangements, as well as pursuing collaborative revenue generating arrangements with healthcare companies. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its development programs or obtain funds through collaborative arrangements with others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would otherwise seek to develop or commercialize itself or cease operations.
The accompanying consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. However, as presented in the consolidated financial statements, at December 31, 2011, the Company had unrestricted cash of $1,179,157 and an accumulated deficit of $39,716,548. The Company also incurred a net loss of $6,170,588 and negative cash flows from operations of $4,860,806 in 2011. As a result, there exists substantial doubt about the Company’s ability to continue as a going concern. The 2011 consolidated 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.
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., (which is wholly owned by the Company), DARA Therapeutics, Inc. (which holds the Company’s assets related to its KRN5500 program and is owned 75% by the Company), and Point Therapeutics Massachusetts, Inc., (which is wholly owned by the Company). The Company has control of all subsidiaries, and as such, they are all consolidated in the presentation of the consolidated financial statements. All significant intercompany transactions have been eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their fair value.
Fair Value Measurements
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 uses valuation models in determining fair value. Based on this valuation technique, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or risks inherent in the inputs.
Investments
The Company’s other investments include investments in privately-held companies. Pursuant to FASB ASC 323, Investments - Equity Method and Joint Ventures, the Company accounts for these investments either at historical cost, or if the Company has significant influence over the investee, the Company accounts for these investments using the equity method of accounting. The Company reviews all investments for indicators of impairment at least annually, or whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. In making impairment determinations for investments in privately-held companies, the Company considers certain factors, including each company’s cash position, financing needs, earnings, revenue outlook, operational performance, management or ownership changes as well as competition.
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, 2011 and 2010, the Company had balances of $929,157 and $5,228,414, respectively, in excess of federally insured limits ($250,000) held in non-investment accounts.
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.
Research and Development Costs
The Company expenses research and development costs as incurred. Research and development costs include personnel and personnel related costs, costs associated with clinical trials, including amounts paid to contract research organizations and clinical investigators, manufacturing, process development and clinical product supply costs, research costs, patent expense, and other consulting and professional services, and allocated facility and related expenses.
Share-Based Compensation Valuation and Expense
The Company measures compensation cost for share-based payment awards granted to employees and non-employee directors at fair value using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight-line basis over the service period for awards expected to vest. Stock-based compensation cost related to share-based payment awards granted to non-employees is adjusted each reporting period for changes in the fair value of the Company’s stock until the measurement date. The measurement date is generally considered to be the date when all services have been rendered or the date that options are fully vested (see Note 10).
Comprehensive Income
FASB ASC 220, Comprehensive Income, requires components of other comprehensive income, including gains and losses on available-for-sale investments, to be included as part of total comprehensive income. The Company’s comprehensive income consists of net loss and unrealized gains and losses on available-for-sale investments. The Company displays comprehensive income and its components as part of the statement of equity and comprehensive income in its consolidated financial statements.
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.
Based on the analysis of its tax positions, the Company has noted some uncertain tax positions that, because of the effect of deferred tax accounting and the existence of net operating losses in all tax years, would results in a decrease in the Company’s deferred tax assets or a reclassification of the character of the deferred tax asset for a given year. The Company has adjusted the deferred tax assets in the disclosure in Note 13 to reflect the effect of these deferred tax assets.
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 earnings per share is computed by dividing the earnings 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 are considered to be common stock equivalents but have been excluded as their effect is anti-dilutive. For the year ended December 31, 2011, 331,200 preferred shares as converted to common stock, no options and no warrants have been excluded. Also, for the year ended December 31, 2010, 1,920,000 preferred shares as converted to common stock, 1,812 options and 2,226,334 warrants to purchase common stock are considered to be common stock equivalents and have been excluded because their inclusion would be anti-dilutive.
Recently Issue Accounting Pronouncements
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.
3. Merger
On February 12, 2008, DARA and Point Therapeutics, Inc. (Point) completed the Merger as described in Note 1. The Directors of Point and DARA, respectively, believed that by combining Point and DARA, the combined company would generate improved long-term operating and financial results and establish a stronger competitive position in the industry by gaining access to greater resources, diversification and increased access to capital. In merging with Point, the DARA board also considered the potential for increased liquidity for its stockholders expected as the result of the Merger.
Following the effectiveness of the Merger, Point changed its corporate name to DARA BioSciences, Inc. and changed its ticker symbol on the NASDAQ Capital Market to “DARA”. The Merger was intended, among other things, to allow the business of privately-held DARA to be conducted by the Company given that DARA’s business became the primary business of the Company following the Merger.
The Merger was accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with GAAP. Under this method of accounting, Point is treated as the acquired company for financial reporting purposes. On February 12, 2008, Point had $761,671 in cash. Under the terms of the Merger Agreement, as of the closing of the Merger, the former holders of DARA equity securities acquired 96.4% of the capital stock of the Company (on a fully diluted basis). Immediately following the Merger, the Board of Directors of the Company consisted of six directors, all of whom were former directors of DARA. In addition, the senior management team of DARA manages the operations of the Company. In accordance with guidance applicable to these circumstances, the Merger was considered to be a capital transaction in substance. Accordingly, for accounting purposes, the Merger was treated as the equivalent of the Company issuing stock for the net assets of Point. The net assets of Point were stated at fair value, which approximates historical cost, with no goodwill or other intangible assets recorded. The Company’s deficit accumulated in the development stage was carried forward after the Merger.
4. Investments
MRI Interventions, Inc.
MRI Interventions, Inc., formerly known as SurgiVision, a privately-held company, is developing “real-time” devices to be used with Functional MRI Technology. The Company’s initial investment of $2,000,000 for 2,273,743 shares was made in 2004. In 2006, the Company distributed a dividend of 1,541,578 and 44,672 shares of MRI Interventions’ common stock to all investors and vested stock option holders, respectively. The remaining investment of 687,493 shares was carried at cost of $222,479 at December 31, 2008.
In January 2009, the Company entered into a stock purchase and loan agreement and related agreements (the “Purchase and Loan Agreement”) with MRI Interventions in which the Company received $1,000,000 of total proceeds. The Company sold 125,000 of its 687,493 shares of MRI Interventions at $4.00 per share. In addition the Company entered into a loan agreement secured by 125,000 shares of the Company’s MRI Interventions stock. The Company recorded a gain of $459,500 on the sale.
Also in January 2009, the board of directors distributed 6,250 MRI Interventions shares to each of three independent members of the board valued at $4.00 per share. The Company distributed an additional 6,250 MRI Interventions shares valued at $4.00 per share as severance to its former Chief Financial Officer. The Company recorded compensation expense of $100,000 and a gain of $91,910 on distribution of nonmonetary asset.
On December 31, 2009, the Company entered into a Stock Purchase Agreement with MRI Interventions pursuant to which the Company sold 134,178 shares of MRI Interventions common stock to MRI Interventions. The purchase price for the shares was paid through cancellation of outstanding principal of $500,000 and accrued interest of $36,712 on the January 2009 secured promissory note issued by the Company to MRI Interventions. The Company recorded a gain of $493,291 on the sale.
On December 28, 2011 MRI Interventions, Inc. filed a Form 10 Registration Statement with the SEC to gain access to the Over the Counter (OTC) public markets. A shareholders meeting is scheduled for February 10, 2012 in Memphis, Tennessee to approve several items related to this transaction.
As of December 31, 2011 and 2010, the remaining investment of 403,314 shares was carried at cost of $130,468. The warrants to acquire 101,250 shares of MRI Interventions common stock at an exercise price of $3.20 per share expired November 2011.
Medeikon
During fiscal 2004, the Company acquired 1,171,944 shares of Medeikon for $600,000 representing a 15% ownership. The Company did not have the ability to exercise significant influence over the management of the investee company, and therefore the investment was carried at its original cost and accounted for using the cost method of accounting for investments in accordance with APB 18, The Equity Method of Accounting for Investments in Common Stock, (APB 18). During 2005, the Company invested an additional $350,000 in Medeikon resulting in an increase in ownership to 23.8%. In accordance with APB 18, the Company re-evaluated its ownership interest and whether it had the ability to exercise significant influence over the operation of Medeikon and determined that the additional investment triggered a change in accounting for the investment from the cost method to the equity method, which the Company adopted in 2005. As required by APB 18, the investment and results of operations for the prior periods presented have been retroactively adjusted and restated to reflect the application of the equity method. During 2006, the Company invested an additional $100,000 in Medeikon resulting in an increase in ownership to approximately 25.4%.
The Company’s share of Medeikon’s loss for the year ended December 31, 2006 exceeded its basis. The loss of a noncontrolling interest is limited to the extent of equity capital. Application of the equity method resulted in an equity method loss in Medeikon for the years ended December 31, 2004, 2005 and 2006 of $22,552, $734,327 and $293,121, respectively, and $1,050,000 for the period from June 22, 2002 (inception) through December 31, 2007. The carrying value at December 31, 2011 and 2010 of the investment in Medeikon was $0.
The Company does not have any other assets measured at fair value that would require nonrecurring fair value adjustments (for example, where there is evidence of impairment).
5. Furniture, Fixtures and Equipment, net
Furniture, fixtures and equipment, net consists of the following at December 31:
The Company recognized a total loss of $1,510 and $160 on disposal of fixed assets in 2011 and 2010 respectively.
Depreciation expense, including depreciation related to assets held under capital leases, was $19,392 and $25,298 for the years ended December 31, 2011 and 2010, respectively.
6. License Agreements
On May 4, 2004, the Company entered into a license agreement with a third party in which the Company received a worldwide non-exclusive license to develop and commercialize licensed products based on patents and technological information in exchange for a promissory note and a royalty agreement related to future products and processes resulting from the technology as defined in the agreement. The Company recorded $1,035,000 in research and development expense during 2004 related to the license.
On July 1, 2004 the Company entered into a license agreement for a compound for the treatment of pain and central and peripheral nervous system conditions or diseases. The Company made a $100,000 license fee payment in 2004 which was recorded in research and development expense. In addition, the Company will be obligated to make future payments upon achievement of certain milestones.
On October 8, 2007, the Company entered into an exclusive license agreement under which the Company received certain intellectual property rights. The Company made a $600,000 license fee payment in October 2007. The Company has capitalized this asset and is amortizing the license over a 5 year period. The Company amortized $120,000 for each of the years ended December 31, 2011, 2010, 2009 and 2008, respectively. In addition, the Company will be obligated to make future payments upon achievement of certain milestones as well as royalty payments as defined in the agreement. Estimated amortization expense for the fiscal year ended 2012, is $100,000.
On May 7, 1997, the Company (formerly Point Therapeutics Massachusetts, Inc.) entered into a license agreement (the Agreement) with Tufts University School of Medicine (Tufts). This Agreement was amended in May 1999. Under the Agreement, the Company received a worldwide license to certain patent and patent applications in exchange for a nonrefundable license fee of $50,000. In July 2011, the Company determined that it was unlikely that any future uses for talabostat would be identified, and as such, terminated the license agreement from Tufts University School of Medicine and ceased maintaining the patent estate. As of December 31, 2011 the Company no longer carries a liability for this patent.
7. Noncontrolling Interest
On May 3, 2004, the Company issued a promissory note (the 2004 Note) to a third party organization in consideration for the license of the patents and technological information related to the therapeutic application of a certain compound for neuropathic pain. The principal amount of the 2004 Note was $1,000,000 payable through issuance of $1,000,000 in common stock of DARA Therapeutics, Inc. (formerly DARA Pharmaceuticals, Inc.), a wholly owned subsidiary of the Company at the maturity date, or through cash payments of $500,000 and $1,000,000 at May 3, 2006 and May 3, 2007, respectively. The original 2004 Note had no stated interest rate.
The Company accounted for the 2004 Note in accordance with APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants (APB 14), and utilized a discounted cash flow model with an incremental borrowing rate of 15% to determine the fair value of the 2004 Note. At May 3, 2004, the Company determined that the fair value of the 2004 Note was approximately $1,035,000 and recorded a discount of $465,000. Also, as part of the original agreement, if the Company elected to settle the debt through issuance of shares of common stock DARA Therapeutics common stock (at a price per share as defined in the agreement), a repurchase put feature would be triggered. Under this repurchase feature, if DARA Therapeutics completed a sub-licensing or commercialization agreement with a third party using the compound technology, the third party would have the ability to require DARA Therapeutics to repurchase its shares of common stock at a price based upon the third party’s percentage of equity ownership in DARA Therapeutics as defined in the agreement.
On March 3, 2006, the promissory note was amended to extend the payment dates to March 3, 2007 and September 3, 2007 and accrue interest at 5% annually on $500,000 beginning March 3, 2006 and 5% annually on the remaining $500,000 beginning March 3, 2007.
Interest expense of $0 for the years ended December 31, 2011 and 2010, and $411,660 for the period from June 22, 2002 (inception) through December 31, 2011 was attributable to the amortization of the debt discount and accrued interest on the 2004 Note.
On March 1, 2007, DARA Therapeutics settled the 2004 note through the issuance of 333,334 shares of common stock of DARA Therapeutics representing 25% of the then outstanding stock of DARA Therapeutics. The Company recorded the issuance of DARA Therapeutics shares as noncontrolling interest in subsidiary in the amount of $1,441,948. Net loss attributable to the third party’s noncontrolling interest was $306,662 and $339,491 for the years ended December 31, 2011 and 2010, respectively, and $1,657,241 for the period from June 22, 2002 (inception) through December 31, 2011; which has reduced the noncontrolling interest in the subsidiary to ($215,292) at December 31, 2011.
8. Leases and Other Financing Arrangements
Operating leases
On November 30, 2007, the Company entered into a lease agreement for 7,520 square feet of office space at 8601 Six Forks Road, Raleigh, North Carolina, known as Forum I. The Company relocated its corporate headquarters from 4505 Falls of the Neuse Road, Raleigh, North Carolina to Forum I in April 2008. The lease term began on April 1, 2008 and expires on March 31, 2013 with the option to terminate earlier for cause or to extend. DARA is recording expenses related to the lease ratably over the term of the lease and as a result has recorded a liability at December 31, 2011 for the deferred lease obligation of $9,099.
In connection with this lease, the Company issued a letter of credit in the amount of $77,080 on December 11, 2007. The letter of credit is renewable annually for the term of the lease with the landlord and is collateralized by cash held in an interest-bearing time deposit at DARA’s financial institution. The security deposit balance has been reduced to $38,554 at December 31, 2011. Total rent expense was $162,071 for each year ended December 31, 2011 and 2010.
DARA also has in place various operating leases related to office equipment.
In July 2011, the Company entered into a financing agreement related to its product liability insurance in the amount of $16,549. The balance outstanding pursuant to this financing agreement as of December 31, 2011 was $8,374.
At December 31, 2011, future minimum commitments under leases with non-cancelable terms of more than one year are as follows:
Capital Leases
As part of the merger with Point during 2008, the Company acquired office equipment under a capital lease agreement of $34,328. This capital lease agreement was terminated in 2009 and the Company recorded a net loss of $19,930 on the capital lease assets and a gain on the extinguishment of the capital lease obligation of $12,240 in connection therewith which is recorded as other income (expense), net on the consolidated statements of operations for the year ended December 31, 2009. Additionally during 2008, the Company entered into a capital lease agreement of $35,801 for additional office equipment. During 2010, the Company entered into a capital lease agreement of $26,100 for additional office equipment. The cost of capital lease assets is included under property and equipment in the balance sheet at December 31, 2011 and 2010, respectively. Accumulated depreciation of the leased equipment was $29,736 and $19,255 at December 31, 2011 and 2010, respectively.
The future minimum lease payments required under capital leases and the present values of the net minimum lease payments as of December 31, 2011 are as follows:
9. Stockholders’ Equity
Pursuant to the Merger Agreement, each share of DARA common stock and preferred stock issued and outstanding immediately prior to the effective time of the merger ceased to be outstanding and was converted into the right to receive 1.031406 shares of post-merger Company common stock, plus cash in lieu of any fractional shares. Additionally, outstanding options and warrants to purchase shares of DARA common stock became options and warrants to purchase shares of post-merger Company common stock adjusted as follows: the number of shares acquirable upon exercise was multiplied by 1.031406 and the exercise price per share was divided by 1.031406. As a result of the transaction, the former DARA stockholders received 96.4% of the Company’s outstanding shares of common stock on a fully-diluted basis and Merger Sub merged with and into DARA, with DARA surviving as a wholly-owned subsidiary of the Company.
Common Stock
On February 26, 2010 and March 5, 2010, the Company entered into two Securities Purchase Agreements with certain accredited investors in connection with the private issuance and sale to such investors of a total of 234,896 shares of the Company’s common stock and 117,456 warrants to purchase shares of common stock. The common stock and warrants were sold in units for $7.52 per unit, with each unit consisting of one share of common stock
and one-half of a warrant to purchase one share of common stock for each unit purchased. The closings of the sale of the units under these securities purchase agreements took place on February 26, 2010 and March 5, 2010 for proceeds of $1,759,545, net of issuance costs of $6,959. Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $7.52. Of these warrants, 114,131 expire on August 26, 2015 and 3,325 expire on September 5, 2015.
On October 22, 2010, the Company entered into a Securities Purchase Agreement with certain accredited investors in connection with a registered direct offering by the Company of 612,667 shares of the Company’s common stock and 306,334 warrants to purchase shares of common stock. The common stock and warrants were sold in units for $2.25 per unit, with each unit consisting of one share of common stock and one-half of a warrant to purchase one share of common stock for each unit purchased. The closing of the sale of these units took place on October 26, 2010 for gross proceeds of $1,378,500 and net proceeds after placement agent fees of $1,262,166. Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $2.79, becomes exercisable on April 26, 2011 and expires April 26, 2016.
Preferred Stock
On December 30, 2010, the Company entered into a Securities Purchase Agreement with certain accredited investors in connection with a registered direct offering by the Company of units comprised of 4,800 shares of Series A convertible preferred stock (which are convertible into a total of 1,920,000 shares of common stock), Class A warrants to purchase 960,000 shares of common stock and Class B warrants to purchase a total of 960,000 shares of common stock, for net proceeds of $4,286,938.
Shares of Series A preferred stock have a liquidation preference equal to $1,000 per share and, subject to certain ownership limitations, are convertible at any time at the option of the holder into shares of Company common stock at a conversion price of $2.50 per share.
Class A warrants entitle the holder to purchase shares of common stock for an exercise price equal to $2.50 and expire December 30, 2015. Class B warrants will entitle the holder to purchase shares of common stock for an exercise price equal to $2.50 and expire December 30, 2011.
Stock Dividend
On April 28, 2005, the board of directors approved a three for two (3:2) stock split in the form of a stock dividend. Stockholders of record on April 28, 2005 received a stock dividend of one share of common stock for every two shares of capital stock (preferred or common) owned on that date.
Warrants
In December 2011, the Company recognized share-based compensation in accordance with the provisions of ASC 505, Equity, using a fair-value approach related to issuance of 200,000 warrants at an exercise price of $1.31 per share to two nonemployees totaling $230,961.
The Company has a total of 2,427,273 warrants at a weighted-average price of $6.95 to purchase its common stock outstanding as of December 31, 2011. These warrants are summarized as follows:
Common Stock Reserved for Future Issuance
The Company has reserved authorized shares of common stock for future issuance at December 31, 2011 as follows:
10. Share-Based Compensation
The Company has two share-based compensation plans, the 2008 Employee, Director, and Consultant Plan (the “2008 Plan”), and the 2003 Amended and Restated Employee, Director, and Consultant Plan (the “2003 Plan”), together referred to herein as the “Stock Plans”.
The 2008 Plan provides for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, and restricted stock and other stock awards. Options granted and shares underlying stock awards issued under the 2008 Plan vest over periods determined by the compensation committee of the board of directors.
The 2003 Plan provided for the granting of incentive stock options to employees and non-qualified stock options to employees, directors, and consultants of the Company or its subsidiaries. In connection with the adoption of the 2008 Plan, the 2003 Plan was frozen as a result of which at December 31, 2011 there no shares of common stock available for future grants under the 2003 Plan.
Incentive stock options, non-qualified stock options and restricted stock awards were granted under the Stock Plans through December 31, 2011. The options are exercisable for a period not to exceed ten years and vesting for the options and restricted shares granted to date range from being 100% fully vested at grant to 25% immediately vested and the remainder vesting over a three year period.
As of December 31, 2011, a total of 1,468,085 shares were authorized for grants under the Stock Plans, of which 86,421 were available for future grant. As of December 31, 2011 there were no restricted stock awards outstanding under the 2008 and 2003 Plans. As of December 31, 2011, a total of 995,199 and 33,649 stock options were outstanding under the 2008 Plan and 2003 Plans, respectively.
The following table summarizes the Company’s stock plan activity under all of the Company’s stock based compensation plans from March 12, 2003 (plan inception) through December 31, 2011:
Effective with the adoption of FASB ASC 718, Compensation-Stock Compensation, as of January 1, 2006, the Company has elected to use the Black-Scholes option pricing model to determine the fair value of options granted. The Company has not paid and does not anticipate paying cash dividends; therefore the expected dividend rate is assumed to be 0%. Stock price volatility is based on an analysis of historical stock price data reported for a peer group of public companies. The expected life is the length of time options are expected to be outstanding before being exercised. The Company estimates expected life using the “simplified method” as allowed under the provision of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, Share-Based Payment. The simplified method uses an average of the option vesting period and the option’s original contractual term. The Company uses the implied yield of U. S. Treasury instruments with terms consistent with the expected life of options as the risk-free interest rate. FASB ASC 718 requires companies to estimate a forfeiture rate for options and accordingly reduce the compensation expense reported. The Company used historical data among other factors to estimate the forfeiture rate.
The fair value of stock options granted to employees and non-employee directors was estimated using a Black-Scholes option-pricing model and the following weighted-average assumptions:
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505, Equity, using a fair-value approach. The equity instruments, consisting of shares of restricted stock, stock options and warrants granted to lenders and consultants, are valued using the Black-Scholes valuation model. Measurement of share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the term of the related financing or the period over which services are received.
The weighted average grant-date fair value of options granted during the years ended December 31, 2011 and 2010 were $1.18 and $1.02, respectively. There were no stock options exercised during the year ended December 31, 2011. The amount of cash received from the exercise of stock options was $100,000 during the year ended December 31, 2010 and the total intrinsic values of the stock options exercised was $84,000. The Company did not realize a tax benefit from stock options exercised during the years ended December 31, 2011 and 2010.
The following summarizes certain information about fully vested stock options and stock options expected to vest as of December 31, 2011:
The following table summarizes certain information about the Company’s stock options outstanding as of December 31, 2011:
The Company recognized stock option compensation expense for employees and non-employee directors as follows:
Stock option compensation expense for non-employees in exchange for services during the years ended December 31, 2011 and 2010 was $2,547 and $4,689, respectively, and $664,300 for the period from June 22, 2002 (inception) through December 31, 2011.
As of December 31, 2011, there was $51,790 of total unrecognized compensation cost for non-vested share-based stock option compensation arrangements which is expected to be recognized over a weighted average period of 0.78 years.
Restricted Stock Activity
In January 2011, the Company issued 66,000 shares of restricted stock to five employees which will vest 100% on the one year anniversary of the grant date. The former Chief Executive Officer/President was awarded 50,000 restricted shares and four employees were each awarded 4,000 restricted shares. The shares vested on the anniversary of the grant, January 3, 2012 and the Company recognized $198,940 and $27,440 stock-based compensation expense in general and administrative and research and development, respectively, for the year ended December 31, 2011. The Company recognized $366,455 and $69,318 stock-based compensation expense in general and administrative and research and development, respectively, for the period from June 22, 2002 (inception) through December 31, 2011.
During 2009 the Company issued 31,250 restricted shares to five employees. The Chief Executive Officer/President was awarded 18,750 restricted shares and four employees each were awarded 3,125 restricted shares. The shares vested on the anniversary of the grant, September 24, 2010 and the Company recognized $167,515 and $41,878 stock-based compensation expense in general and administrative and research and development, respectively, for the year ended December 31, 2010.
The Company recognized share-based compensation expense related to issuance of restricted stock to certain members of the board of directors in general and administrative expense of $6,388 and $48,479 for the years ended December 31, 2011 and 2010, respectively, and $224,109 for the period from June 22, 2002 (inception) through December 31, 2011.
The Company recognized share-based compensation related to issuance of restricted stock to nonemployees in exchange for services totaling $98,613 and $94,408 for the years ended December 31, 2011 and 2010, respectively, and $556,949 for the period from June 22, 2002 (inception) through December 31, 2011.
As of December 31, 2011, there was no unrecognized compensation cost related to nonvested restricted stock arrangements.
11. Employee Benefit Plan
During 2005, the Company adopted a defined contribution employee benefit plan that covers all qualifying employees. The plan provides for voluntary employee contributions and a discretionary matching employer
contribution equal to amounts that do not exceed the maximum amounts allowed by the Internal Revenue Service. As part of the Company’s cost reduction program, effective April 1, 2009 the Company amended its contribution to the employee benefit plan to remove the Safe Harbor Cash or Deferred Arrangement provisions.
Defined contribution plan expense prior to the effective date of the amendment was $179,359 for the period from June 22, 2002 (inception) through December 31, 2010. There was no discretionary employer match and therefore no expense was recognized in 2011 and 2010.
12. Subsidiaries
During 2004, the Company organized several subsidiaries: Signum Pharmaceuticals, OnsetThera, Inc., and MIKKO Pharmaceuticals. Upon formation, the Company acquired 1,000,000 shares of each of the subsidiaries which represented 100% equity ownership. OnsetThera, Inc. and Signum Pharmaceuticals obtained licensing rights for certain patents and technologies during 2004 in exchange for certain payments and the sale to the licensors of a 40% and 25% equity ownership in the respective entities. These transactions reduced the Company’s ownership in OnsetThera, Inc. to 60% and its ownership in Signum Pharmaceuticals to 75%.
As a result of the Company’s merger with Point Therapeutics, Inc. February 12, 2008, the Company acquired Point Therapeutics’ wholly owned subsidiary, Point Massachusetts, Inc.
Effective December 18, 2006, the Company filed certificates of dissolution for both Onset Thera, Inc. and NYVARA Pharmaceuticals, Inc. Effective December 16, 2008, the company filed a certificate of dissolution for Mikko Pharmaceuticals, Inc. Effective December 8, 2009, the company filed a certificate of dissolution for Signum Pharmaceuticals, Inc.
13. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities for federal income tax purposes are as follows at December 31:
The Company has provided a valuation allowance against the deferred tax assets recorded as of December 31, 2011 and 2010, due to uncertainties as to their ultimate realization. The increase in the valuation allowance in each period resulted primarily from the additional net operating loss carryforward generated.
As of December 31, 2011 and 2010, respectively, the Company had approximately $204 million and $206 million of U.S. Federal net operating loss carryforwards related primarily to net operating losses acquired through its Point Therapeutics, Inc. merger which have already started to expire. As of December 31, 2011 and 2010, respectively, the Company also has approximately $41 million and $63 million of state net economic loss carryforwards that have already started to expire. Additionally, the Company has research and development credits of $3,113,400 and $922,112 for federal and state tax purposes, respectively, that have already started to expire.
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.
Income tax computed at the statutory federal income tax rate of 34% is reconciled to the provision (benefit) for income taxes for the years ended December 31 as follows:
On January 1, 2007, the Company adopted ASC 740-10 (formerly FIN 48). There was a cumulative effect adjustment of $219,338 upon adoption and included in this amount is $24,893 related to penalties and interest. An additional $11,100 of penalties and interest on these liabilities was accrued in 2010 and the Company has recorded total interest and penalties related to these liabilities of $85,277 as of December 31, 2010. During 2011, the Company recognized a decrease in its liability for unrecognized tax benefits. The decrease in the liability for unrecognized tax benefits was due to the Company no longer being subject to examination for tax periods prior to 2007 in the state jurisdictions to which the liability for unrecognized tax benefits related.
The following is a rollforward of gross unrecognized tax positions:
A benefit of $85,277 in accrued interest and penalties was recognized in interest income (expense), net at December 31, 2011.
14. Recent Developments
On January 17, 2012 (the “Closing Date”), the Company, Oncogenerix, Inc. (“Oncogenerix”), certain stockholders of Oncogenerix, and certain other parties thereto entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Oncogenerix merged with a wholly-owned subsidiary of DARA, with Oncogenerix continuing in existence as the surviving corporation (the “Merger”). As a result of the Merger, Oncogenerix became a wholly-owned subsidiary of DARA.
Oncogenerix is a specialty bio-pharmaceutical company which is focused on the identification, development and commercialization of branded and generic oncological bio-pharmaceutical products.
Pursuant to the terms of the Merger Agreement, as of the Closing Date, the shares of Oncogenerix common stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) ceased to be outstanding and were converted into 1,114,560 shares of DARA common stock (the “Closing Shares”).
At the closing, 167,184 shares of DARA common stock were withheld from the Closing Shares and deposited into an escrow account (the “Escrow Shares”). In accordance with the Merger Agreement, the Escrow Shares may be used for purposes of the payment to DARA of indemnification claims under the Merger Agreement against the Oncogenerix stockholders.
In addition to the Closing Shares, the Oncogenerix stockholders will, subject to the approval of at least a majority of the outstanding shares of the issued and outstanding shares of DARA common stock, be entitled to receive up to an additional 1,114,560 shares of DARA common stock based upon the combined company’s achievement of certain revenue or market capitalization milestones during the 60 months following the Closing Date (the “Contingent Merger Consideration Shares”).
On January 17, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor in connection with a registered direct offering by the Company (the “Offering”) of 1,700 shares of the Company’s Series B convertible preferred stock (which are convertible into a total of 1,238,616 shares of common stock) and warrants to purchase 619,308 shares of the Company’s common stock, for gross proceeds of $1.7 million. The closing of the sale of these securities took place on January 20, 2012 for net proceeds of $1.5 million.
Shares of Series B preferred stock have a liquidation preference equal to $1,000 per share and, subject to certain ownership limitations, are convertible at any time at the option of the holder into shares of the Company’s common stock at a conversion price of $1.3725 per share. The warrants represent the right to acquire shares of common stock at an exercise price of $1.31 per share and will expire on January 20, 2017.
The net proceeds received by the Company from the Offering will be used to fund commercialization activities, for the ongoing development of its lead candidates and for working capital and general corporate purposes.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Accounting Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in Securities and Exchange Commission rules and forms and that material information relating to the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).” Based on management’s assessment, management concluded that, as of December 31, 2011, the Company’s internal control over financial reporting was effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
(c) Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers
The following is a list of our executive officers and their principal positions with us as of February 10, 2012.
David J. Drutz, M.D. has served as our president and CEO since December 2011 and as a member of our board of directors since February 2008. Dr. Drutz currently serves as chairman of the board of directors of Gentris Corporation, a pharmacogenomic (PGx) services company, Vaxin Inc., a vaccine development company, and as a director of MethylGene Inc., a biopharmaceuticals company (TSX: MYG). From 2000 to 2010, Dr. Drutz served as Chairman of the board of directors of Tranzyme Pharma, Inc. (NASDAQ:TZYM). He was formerly a General Partner with Pacific Rim Ventures (Tokyo, Japan), a venture capital firm focused on global biotechnology investment opportunities. He has also been President of Pacific Biopharma Associates, a biotechnology consulting firm, since 1999. Dr. Drutz was formerly Vice President Biological Sciences (Drug Discovery) and Vice President Clinical Research (AIDS therapeutics) at Smith Kline and French Laboratories in King of Prussia, PA, and Vice President Clinical Development, Daiichi Pharmaceutical Corporation, Ft. Lee, NJ. At Daiichi he was responsible for the development of anti-infective and oncology products. Dr. Drutz left Daiichi in 1990 to enter the biotechnology industry. Before joining PRV he was President and Chief Executive Officer of Inspire Pharmaceuticals, Inc., a company specializing in therapeutics for diseases of the respiratory tract and other mucus membrane surfaces (NASDAQ: ISPH). Dr. Drutz received his M.D. degree at the University of Louisville, and postgraduate medical training at Vanderbilt University, following which he served as a U.S. Navy medical officer in Asia. He held senior faculty positions at the University of California, San Francisco, University of Texas and the University of Pennsylvania. He is board-certified in Internal Medicine, and a Fellow of the American College of Physicians and the Infectious Diseases Society of America.
Dr. Drutz’s experience as a medical doctor board-certified in Internal Medicine is extremely valuable to our board. In addition to his medical background, Dr. Drutz has a deep understanding of the drug development process acquired through holding a position in which he was responsible for the development of several pharmaceutical products. Dr. Drutz brings to his service on our board extensive experience in and understanding of the biotechnology industry, and a unique perspective acquired through his experience with investment and consulting firms and as a senior faculty member at several universities.
Christopher Clement has served as our chief operating officer since January 2012. From February 2011 through January 2012 Mr. Clement was the President, Chief Executive Officer and a director of Oncogenerics, Inc. Mr. Clement has a 30 year career in the bio-pharmaceutical industry that includes executive management, marketing and sales, strategic and product planning, business development, and general management. Mr. Clement was President and CEO of Savient Pharmaceuticals Inc., a publicly-held specialty biopharmaceutical company (NASDAQ: SVNT), from 2002 to 2009. From 2000 to 2002, Mr. Clement served as the Chairman and CEO of Epicyte Pharma, a pharmaceutical company engaged in the development of antibody-based products. Previously, from 1997 to 2000 he held positions of Executive Vice President, Senior Vice President, and Chief Marketing Officer at Ares-Serono Group, a Swiss developer of pharmaceuticals. From 1988 to 1997, Mr. Clement held a number of senior management positions at Searle Pharmaceuticals, a research-based pharmaceutical company that manufactures and markets prescription pharmaceuticals and other healthcare solutions worldwide, including Vice President of Marketing, Vice President of Corporate Product Planning, General Manager of Global Franchises and Division President. Mr. Clement received a B.A. in Marketing and Business from Mercy College.
Mr. Clement brings to the Board of Directors executive leadership skills and marketing expertise acquired as an executive in the pharmaceutical industry. He has significant board of director experience from his service on the boards of directors of several biotechnology companies
Ann A. Rosar has served as our Chief Accounting Officer since January 2009 and as our Controller from November 2007 until January 2009. Ms. Rosar has over twenty years experience in finance with publicly held companies and more than ten years experience regarding regulatory reporting requirements. Prior to joining the Company, Ms. Rosar was the Manager of Financial Reporting and Accounting with Cicero, Inc., a provider of business integration software (OTCBB: CICN), from June 2000 until November 2007, where she was responsible for Securities and Exchange Commission reporting, audits and budget analysis. Prior to that position, she served as Senior Financial Analyst-Business Operations for Nextel Communications. Ms. Rosar received a MBA in Finance from the University of Houston and received her undergraduate degree from North Carolina State University.
Directors
The following table sets forth certain information concerning our non-employee directors as of February 10, 2012:
Haywood Cochrane has served as a member of our board of directors since February 2008. Mr. Cochrane served as Vice Chairman and a director of I-Trax, Inc., a publicly traded, total population health management and productivity company (AMEX: DMX), from 2004 to 2008, when it was acquired by Walgreens. He joined I-Trax when I-Trax acquired CHD Meridian Healthcare where he served as Chairman and Chief Executive Officer from 1997 to 2004. Mr. Cochrane has over 20 years of healthcare experience in executive and senior management positions, including Senior Vice President and Chief Operating Officer of Roche Biomedical Laboratories, President and Chief Executive Officer of Allied Clinical Laboratories and Executive Vice President and Chief Financial Officer of Laboratory Corporation of America. Mr. Cochrane earned an A.B. degree in Political Science from the University of North Carolina at Chapel Hill where he was a Morehead Scholar.
Mr. Cochrane brings to our board extensive executive and senior management experience in the healthcare industry and is an “audit committee financial expert” as such term is defined under applicable SEC rules. He is further qualified for service on our board because of his relevant business expertise and leadership experience acquired through his experience serving as Vice Chairman and Chairman of the boards of directors of other healthcare-related companies.
Steve Gorlin has served as a member of our board of Directors since December 2011. Mr. Gorlin was a founder of the Company and previously served as a director. Mr. Gorlin currently serves as chairman and CEO of DemeRx, Inc., chairman of NTC China, Inc., and vice chairman of MiMedx, Inc. (OTCBB:MDXG). Mr. Gorlin formerly served as a founder and director of Hycor Biomedical, Inc. (which was acquired by Agilent), Theragencis Corporation (NYSE: TGX), CytRx Corporation (NASDAQ: CYTR), Medicis Pharmaceutical Corporation (NYSE: MRX), EntreMed, Inc. (NASDAQ: ENMD), Medivation, Inc. (NASDAQ: MDVN), and MRI Interventions, Inc. (formerly Surgivision, Inc.). From 1998 to 2003, Mr. Gorlin served on the Business Advisory Council to The Johns Hopkins School of Medicine and currently sits on the board of The Johns Hopkins Alliance for Science and Technology Development, The Johns Hopkins BioMedical Engineering Advisory Board, and on the board of the Andrews Institute.
Mr. Gorlin brings to our board of directors a vital understanding and appreciation of the Company’s business and history acquired through his service with the Company as well as significant knowledge of and experience in the pharmaceutical and medical industries. Mr. Gorlin has extensive business, managerial, executive and leadership experience that further qualify him to serve as a member of the board and a valuable understanding of the role played by the board of directors acquired through service on the boards of many companies.
Gail F. Lieberman has served as a member of our board of directors since April 2009. She is a member of the audit committee and chairs the compensation committee. Ms. Lieberman currently serves as a director and a member of the audit and compensation committee of ICTS International N.V., a security services company (OTC BB: ICTSF), and is a member of the South Central CT Regional Water Authority Board. Ms. Lieberman is the founder and Managing Partner of Rudder Capital, LLC, which provides financial and strategic advisory services for middle-market companies including advisory and strategic consulting. She has been a chief financial officer for several Fortune 500 companies, including Thomson Corporation’s Financial & Professional Publishing division, Moody’s Investor Service (D&B) and Scali, McCabe, Sloves (Ogilvy Group). Ms. Lieberman previously served as a director for three public companies in the healthcare and aerospace sectors: I-Trax Inc., a total population health management and productivity company (which was acquired by Walgreens); TriPath Imaging Inc. (which was acquired by Becton, Dickinson and Company); and Breeze-Eastern Corporation (AMEX: BZC). In addition, she sits on several advisory boards and non-profit boards including NY Report. Ms. Lieberman holds a BA in Mathematics and Physics and an MBA in Finance from Temple University.
Ms. Lieberman has a significant understanding of the role played by the board of directors which was acquired through her service on the boards of several companies, including public companies in the healthcare sector. She provides the board with financial expertise acquired through experience as a chief financial officer and as the founder and managing partner of a financial and strategic advisory consulting firm. Ms. Lieberman’s educational background in Math, Physics and Business Administration also provides our board with a unique and valuable perspective.
John C. Thomas, Jr. has served as a member of our board of directors since February 2012. Mr. Thomas previously served as our chief financial officer from 2002 through 2009. Mr. Thomas has served as Chief Financial Officer of Cormatrix Cardiovascular, Inc., a medical device company, since 2001 and as Chief Financial Officer of Motion Reality, Inc., a motion capture and simulation company, since 1991. Mr. Thomas previously served as acting Chief Financial Officer for DemeRx, Inc. from March 2010 through December 2011, as Chief Financial Officer for MRI Interventions, Inc. (formerly Surgivision, Inc.), a medical device company, from 1998 through 2010, and as Chief Financial Officer for MiMedx Group, Inc., a publicly traded biomedical products company (OTCBB:MDXG), from 2007 through 2008. Mr. Thomas has also served as Chief Financial Officer of several other companies including GMP Companies, Inc., EntreMed, Inc., Medicis Pharmaceutical Corporation, Biopool International, Inc. and CytRx Corporation. Mr. Thomas is a Certified Public Accountant and a trustee and chairman of the Finance Committee of The Walker School, a private Pre-K through 12 grade school. He graduated from the University of Virginia, McIntyre School of Commerce with a business degree, concentration in accounting.
Mr. Thomas brings financial and development stage company expertise to our board of directors acquired through his education and his experience as a Chief Financial Officer of numerous companies.
Audit Committee
The board of directors has an Audit Committee whose current members are Haywood Cochrane (Chairman), John C. Thomas, Jr. and Gail Lieberman. The primary purpose of the Audit Committee is to act on behalf of the board of directors in its oversight of all material aspects of our accounting and financial reporting processes, internal controls and audit functions, including our compliance with Section 404 of the Sarbanes-Oxley Act of 2002. The board of directors has determined that Mr. Cochrane is an “audit committee financial expert” as that term is defined under Regulation S-K, Item 407(d)(5)(ii).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who beneficially own more than 10% of our outstanding common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulations to furnish us with all copies of Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us, we believe that during the fiscal year ended December 31, 2011, all filing requirements were timely satisfied except that Ms. Rosar filed a late Form 4 with respect to restricted stock grant and Mr. Cochrane, Dr. Drutz, and Ms. Lieberman each filed a Form 5 with respect to a stock option grant that was not reported on Form 4.
Code of Ethics and Conduct
Our board of directors adopted a code of business ethics and conduct (the “Code of Ethics”), applicable to all of our executives, directors and employees. The Code of Ethics is available in print to any shareholder that requests a copy. Copies may be obtained by contacting Investor Relations at our corporate headquarters. Our Code of Ethics is also available in the Investor Relations section of our website at http://www.darabiosciences.com. We intend to make any disclosures regarding amendments to, or waivers from, the Code of Ethics required under Form 8-K by posting such information on our website.
Item 11.
Item 11. Executive Compensation.
Executive Officer Compensation
The following table sets forth information concerning the compensation earned by the individuals that served as our Principal Executive Officer during 2011 and our most highly compensated executive officer other than the individuals who served as our Principal Executive Officer during 2011 (collectively, the “named executive officers”):
2011 Summary Compensation Table
(1) The amounts shown in this column indicate the grant date fair value of stock awards granted in the subject year computed in accordance with FASB ASC Topic 718. For additional information regarding the assumptions made in calculating these amounts, see Note 10 to our audited, consolidated financial statements included elsewhere herein.
(2) The amounts shown in this column indicate the grant date fair value of option awards granted in the subject year computed in accordance with FASB ASC Topic 718. For additional information regarding the assumptions made in calculating these amounts, see Note 10 to our audited, consolidated financial statements included elsewhere herein.
(3) This amount reflects the compensation Dr. Drutz received as compensation for his service as a non-employee member of the board of directors prior to his appointment as our president and chief executive officer and includes cash fees of $49,356 and an option grant with a grant date fair value computed in accordance with FASB ASC Topic 718 of $35,650.
In 2011, Dr. Drutz, as Chief Executive Officer and President, was granted an option award covering 375,000 shares which vested immediately. In 2011 Mr. Franco, former Chief Executive Officer and President and Ms. Rosar were granted restricted stock awards covering 50,000 shares and 4,000 shares, respectively. In 2010, Mr. Franco, former Chief Executive Officer and President, and Ms. Rosar were granted option awards covering 62,500 shares and 3,125 shares, respectively.
Outstanding Equity Awards at 2011 Fiscal Year-End
The following table provides information regarding equity awards held by the named executive officers as of December 31, 2011.
(1) The amounts set forth in this column were calculated by multiplying the closing market price of our common stock on December 31, 2011 ($1.24) by the number of shares held on such date.
(2) Reflects the unvested portion of an option grant which will fully vest September 15, 2012.
(3) Reflects the unvested portion of an option grant which will vest in two in equal annual installments beginning May 12, 2012.
Compensation of Directors
The following table sets forth information concerning the compensation earned by the individuals serving as non-employee directors during 2011:
(1) The amounts shown in this column indicate the grant date fair value of option awards granted in the subject year computed in accordance with FASB ASC Topic 718. For additional information regarding the assumptions made in calculating these amounts, see Note 10 to our audited, consolidated financial statements included elsewhere herein.
(2) The table below sets forth the aggregate number of stock options held by each non-employee director as of December 31, 2011.
While Dr. Drutz did serve as a non-employee director during most of 2011, he was serving as our President and Chief Executive Officer as of December 31, 2011. All compensation that Dr. Drutz received for his service as a director in 2011 is included in the 2011 Summary Compensation Table above.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Stock Ownership Table
The following table sets forth, as of February 13, 2012, certain information concerning beneficial ownership of our common stock (as determined under the rules of the SEC) by (1) each of our directors, (2) each of our executive officers, (3) all directors and executive officers as a group and (4) each person known by us to be the beneficial owner of more than five percent (5%) of our common stock.
Except as otherwise indicated, the address for each person is to the care of DARA BioSciences, Inc., 8601 Six Forks Road, Suite 160, Raleigh, North Carolina 27615.
* Less than one percent.
(1) Represents shares subject to options and warrants which are exercisable within 60 days and underlying shares of Series A Convertible Preferred Stock convertible within 60 days.
(2) Represents options held for the benefit of Rudder Capital, LLC.
Equity Compensation Plan Information
The following table summarizes the number of outstanding options granted to employees, directors and consultants, as well as the number of securities remaining available for future issuance our equity compensation plans as of December 31, 2011.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The following members of our board of directors are “independent” as such term is defined in the listing standards of The Nasdaq Stock Market and the applicable rules of the SEC: Haywood D. Cochrane, Steve Gorlin, Gail Lieberman and John C. Thomas, Jr.
Item 14.
Item 14. Principal Accounting Fees and Services.
The following table presents fees for professional audit services rendered by Ernst & Young LLP for the audit of our consolidated financial statements for the fiscal years ended December 31, 2011 and December 31, 2010 and fees billed for other services rendered by Ernst & Young LLP during those periods.
The aggregate fees billed for professional services by Ernst & Young LLP in 2011 and 2010 for these various services were:
(1) Audit Fees consist of the aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements and reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q and also includes fees billed for consents, comfort letters and assistance with and review of documents filed with the SEC.
(2) Audit-related fees consist of assurance and related services relating to financial accounting and reporting standards not classified as audit fees.
(3) Tax fees principally included review of and consultation regarding the Company’s federal and state tax returns and tax planning.
Appointment of Registered Public Accounting Firm and Pre-Approval of Audit and Non-Audit Services
The Audit Committee pre-approves all audit and other permitted non-audit services provided by our independent auditors. Pre-approval is generally provided for up to one year, is detailed as to the particular category of services and is subject to a monetary limit. Our independent auditors and senior management periodically report to the Audit Committee the extent of services provided by the independent auditors in accordance with the pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
The following documents are included as part of this Annual Report on Form 10-K.
(a)(1) The Consolidated Financial Statements and related Notes filed as part of this Report are listed and indexed on Page 31.
(a)(2) Financial Statement Schedules:
All schedules are omitted because they are inapplicable, not required or the information is included in the Consolidated Financial Statements or the related Notes.
(a)(3) Exhibits:
The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as part of this Annual Report on Form 10-K.
(b) The Exhibits are set forth on the following exhibit index. Management contracts, compensatory plans and arrangements are identified in the exhibit index with an asterisk “*.”
(c) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 17, 2012.
DARA BIOSCIENCES, INC.
By:
/s/ David J. Drutz, M.D.
David J. Drutz, M.D., President and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and executive officers of DARA BioSciences, Inc., hereby severally constitute and appoint Ann A. Rosar our true and lawful attorney and agent, with full power to her to sign for us, and in our names in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K of DARA BioSciences, Inc. filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on dates indicated.
EXHIBIT INDEX
* Management Contract or Compensatory Plan or Arrangement.
** Confidential Treatment requested for certain portions of this Agreement.