Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-50626
CYCLACEL PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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91-1707622 |
(State or other jurisdiction of
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(IRS Employer Identification. No.) |
incorporation or organization) |
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200 CONNELL DRIVE, SUITE 1500
BERKELEY HEIGHTS, NJ 07922
(Address of principal executive offices)
Registrants telephone number, including area code: (908) 517-7330
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of
November 7, 2008 there were 20,433,129 shares of the issuers common stock outstanding.
CYCLACEL PHARMACEUTICALS, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CYCLACEL PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In $000s, except share amounts)
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December 31, |
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September 30, |
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2007 |
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2008 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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30,987 |
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26,723 |
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Short-term investments |
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27,766 |
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6,998 |
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Inventory |
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213 |
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571 |
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Prepaid expenses and other current assets |
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4,811 |
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3,017 |
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Total current assets |
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63,777 |
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37,309 |
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Property, plant and equipment (net) |
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3,016 |
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2,288 |
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Deposits and other assets |
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196 |
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196 |
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Intangible assets (net) |
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4,305 |
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Goodwill |
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4,618 |
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1,832 |
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Total assets |
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75,912 |
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41,625 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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4,958 |
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1,301 |
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Accrued liabilities |
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4,015 |
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5,710 |
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Other current liabilities |
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1,279 |
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1,291 |
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Warrant liability |
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3,545 |
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224 |
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Current portion of other accrued restructuring charges |
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905 |
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1,349 |
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Current portion of equipment financing |
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10 |
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Total current liabilities |
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14,712 |
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9,875 |
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Other accrued restructuring charges, net of current |
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2,090 |
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1,361 |
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Other long term payables |
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1,141 |
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616 |
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Total liabilities |
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17,943 |
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11,852 |
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Stockholders equity: |
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Preferred stock, $0.001 par value; 5,000,000 shares
authorized at December 31, 2007 and September 30, 2008;
2,046,813 shares issued and outstanding at December 31,
2007 and September 30, 2008. Aggregate preference in
liquidation of $20,673,000 at December 31, 2007 and
September 30, 2008 |
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2 |
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2 |
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Common stock, $0.001 par value; 100,000,000 shares
authorized at December 31, 2007 and September 30, 2008;
20,433,129 shares issued and outstanding at December 31,
2007 and September 30, 2008 |
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20 |
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20 |
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Additional paid-in capital |
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222,906 |
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223,186 |
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Accumulated other comprehensive loss |
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(2,630 |
) |
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1,337 |
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Deficit accumulated during the development stage |
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(162,329 |
) |
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(194,772 |
) |
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Total stockholders equity |
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57,969 |
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29,773 |
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Total liabilities and stockholders equity |
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75,912 |
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41,625 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
CYCLACEL PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In $000s, except share and per share amounts)
(Unaudited)
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Period from |
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August 13, |
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1996 |
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Three Months Ended |
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Nine Months Ended |
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(inception) to |
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September 30, |
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September 30, |
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September 30, |
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2007 |
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2008 |
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2007 |
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2008 |
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2008 |
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Revenues: |
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Collaboration and research and
development revenue |
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10 |
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3,000 |
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Product revenue |
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257 |
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590 |
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590 |
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Grant revenue |
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33 |
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12 |
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107 |
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36 |
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3,632 |
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Total revenue |
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33 |
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269 |
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117 |
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626 |
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7,222 |
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Operating expenses: |
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Cost of goods sold |
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120 |
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315 |
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315 |
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Research and development |
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4,449 |
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4,030 |
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12,742 |
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15,718 |
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157,262 |
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Selling, general and
administrative |
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2,523 |
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3,218 |
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8,022 |
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11,337 |
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59,291 |
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Goodwill and intangibles
impairment |
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6,344 |
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6,344 |
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6,344 |
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Restructuring
expenses |
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489 |
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81 |
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489 |
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2,268 |
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Total operating expenses |
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6,972 |
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14,201 |
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20,845 |
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34,203 |
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225,480 |
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Operating loss |
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(6,939 |
) |
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(13,932 |
) |
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(20,728 |
) |
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(33,577 |
) |
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(218,258 |
) |
Other income (expense): |
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Costs associated with aborted
2004 IPO |
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(3,550 |
) |
Change in valuation of
derivative |
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(19 |
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(89 |
) |
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(308 |
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Change in valuation of warrants |
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951 |
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432 |
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2,815 |
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3,321 |
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6,526 |
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Foreign exchange gains/(losses) |
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459 |
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(4,776 |
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1,139 |
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(4,638 |
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(4,180 |
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Interest income |
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955 |
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287 |
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2,769 |
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1,184 |
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13,345 |
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Interest expense |
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(54 |
) |
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(69 |
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(154 |
) |
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(244 |
) |
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(4,383 |
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Total other income (expense) |
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2,292 |
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(4,126 |
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6,480 |
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(377 |
) |
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7,450 |
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Loss before taxes |
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(4,647 |
) |
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(18,058 |
) |
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(14,248 |
) |
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(33,954 |
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(210,808 |
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Income tax benefit |
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433 |
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411 |
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1,549 |
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1,511 |
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16,036 |
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Net loss |
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(4,214 |
) |
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(17,647 |
) |
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(12,699 |
) |
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(32,443 |
) |
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(194,772 |
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Dividends on Preferred Ordinary
shares |
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(38,123 |
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Net loss applicable to common
shareholders |
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(4,214 |
) |
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(17,647 |
) |
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(12,699 |
) |
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(32,443 |
) |
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(232,895 |
) |
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Net loss per share Basic and
diluted |
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$ |
(0.21 |
) |
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$ |
(0.86 |
) |
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$ |
(0.65 |
) |
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$ |
(1.59 |
) |
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Weighted average common shares
outstanding |
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20,433,129 |
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20,433,129 |
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19,685,457 |
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20,433,129 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
CYCLACEL PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In $000s)
(Unaudited)
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Period from |
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August 13, |
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1996 |
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Nine Months Ended |
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(inception) to |
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September 30, |
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September 30, |
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2007 |
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2008 |
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2008 |
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Cash flows from operating activities: |
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Net loss |
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(12,699 |
) |
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(32,443 |
) |
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(194,772 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
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Accretion of deferred consideration payable in common
stock related to the acquisition of ALIGN |
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29 |
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39 |
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Accretion of interest on notes payable, net of
amortization of debt premium |
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59 |
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78 |
|
Amortization of investment premiums, net |
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(220 |
) |
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(1,273 |
) |
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(2,146 |
) |
Change in valuation of derivative |
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89 |
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308 |
|
Change in valuation of warrants |
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(2,815 |
) |
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(3,321 |
) |
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(6,526 |
) |
Depreciation and amortization |
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707 |
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1,619 |
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11,832 |
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Goodwill and intangibles impairment |
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6,344 |
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6,344 |
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Foreign exchange (gain) loss |
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(1,432 |
) |
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5,184 |
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8,104 |
|
Deferred revenue |
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(98 |
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Compensation for warrants issued to non employees |
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1,215 |
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Shares issued for IP rights |
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446 |
|
Gain on disposal of property, plant and equipment |
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27 |
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Stock based compensation |
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1,335 |
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1,202 |
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15,089 |
|
Provision for restructuring |
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81 |
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|
383 |
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2,162 |
|
Amortization of issuance costs of Preferred Ordinary C
shares |
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2,517 |
|
Changes in operating assets and liabilities: |
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Prepaid expenses and other current assets |
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(2,088 |
) |
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1,184 |
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(3,016 |
) |
Accounts payable and other current liabilities |
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|
(588 |
) |
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(2,499 |
) |
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|
(1,298 |
) |
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Net cash used in operating activities |
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|
(17,630 |
) |
|
|
(23,532 |
) |
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(159,695 |
) |
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Investing activities: |
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Purchase of ALIGN |
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(3,763 |
) |
Purchase of property, plant and equipment |
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|
(800 |
) |
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|
(354 |
) |
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|
(8,796 |
) |
Proceeds from sale of property, plant and equipment |
|
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|
26 |
|
Purchase of short-term investments |
|
|
(27,429 |
) |
|
|
(857 |
) |
|
|
(154,454 |
) |
Redemptions of short-term investments, net of maturities |
|
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22,899 |
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153,381 |
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Net cash (used in) provided by investing activities |
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(28,229 |
) |
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|
21,688 |
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(13,606 |
) |
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Financing activities: |
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Payment of capital lease obligations |
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(89 |
) |
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(10 |
) |
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(3,719 |
) |
Proceeds from issuance of ordinary and preferred ordinary
shares, net of issuance costs |
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90,858 |
|
Proceeds from issuance of common stock and warrants, net of
issuance costs |
|
|
33,359 |
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|
75,983 |
|
Net proceeds from stock options and warrants exercised |
|
|
163 |
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|
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|
163 |
|
Payment of preferred stock dividend |
|
|
(921 |
) |
|
|
(921 |
) |
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|
(3,065 |
) |
Repayment of government loan |
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(455 |
) |
Government loan received |
|
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|
|
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|
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|
414 |
|
5
CYCLACEL PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In $000s)
(Unaudited)
|
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|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
|
|
|
|
|
August 13, |
|
|
|
|
|
|
|
|
|
|
|
1996 |
|
|
|
Nine Months Ended |
|
|
(inception) to |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
2008 |
|
Loan received from Cyclacel Group Plc |
|
|
|
|
|
|
|
|
|
|
9,103 |
|
Proceeds of committable loan notes issued from shareholders |
|
|
|
|
|
|
|
|
|
|
8,883 |
|
Loans received from shareholders |
|
|
|
|
|
|
|
|
|
|
1,645 |
|
Cash and cash equivalents assumed on stock purchase |
|
|
|
|
|
|
|
|
|
|
17,915 |
|
Costs associated with stock purchase |
|
|
|
|
|
|
|
|
|
|
(1,951 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
32,512 |
|
|
|
(931 |
) |
|
|
195,774 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
222 |
|
|
|
(1,489 |
) |
|
|
4,250 |
|
Net (decrease) increase in cash and cash equivalents |
|
|
(13,347 |
) |
|
|
(2,775 |
) |
|
|
22,473 |
|
Cash and cash equivalents at beginning of period |
|
|
44,238 |
|
|
|
30,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
31,113 |
|
|
|
26,723 |
|
|
|
26,723 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash received during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
1,716 |
|
|
|
844 |
|
|
|
11,766 |
|
Taxes |
|
|
|
|
|
|
2,113 |
|
|
|
14,997 |
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
(122 |
) |
|
|
(169 |
) |
|
|
(1,850 |
) |
Schedule of non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of equipment purchased through capital leases |
|
|
|
|
|
|
|
|
|
|
3,470 |
|
Issuance of Ordinary shares in connection with license
agreements |
|
|
|
|
|
|
|
|
|
|
592 |
|
Issuance of Ordinary shares on conversion of bridging loan |
|
|
|
|
|
|
|
|
|
|
1,638 |
|
Issuance of Preferred Ordinary C shares on conversion of
secured convertible loan notes and accrued interest |
|
|
|
|
|
|
|
|
|
|
8,893 |
|
Issuance of Ordinary shares in lieu of cash bonus |
|
|
|
|
|
|
|
|
|
|
164 |
|
Issuance of other long term payable on ALIGN acquisition |
|
|
|
|
|
|
|
|
|
|
1,122 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
CYCLACEL PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Cyclacel Pharmaceuticals, Inc. (Cyclacel or the Company) is a development-stage
biopharmaceutical company dedicated to the discovery, development and commercialization of novel,
mechanism-targeted drugs to treat human cancers and other serious disorders. Cyclacels strategy is
focused on leading edge therapeutic management of cancer patients based on a portfolio of three
products marketed by its ALIGN Pharmaceuticals, LLC (ALIGN) subsidiary and a deep development
pipeline.
As a result of the recent revised operating plan announced on September 16, 2008, the Company is
focusing its clinical development priorities on:
|
|
|
Sapacitabine in acute myeloid leukemia or AML in the elderly; |
|
|
|
|
Sapacitabine in myelodysplastic syndromes or MDS; |
|
|
|
|
Sapacitabine in cutaneous T-cell lymphoma or CTCL; and |
|
|
|
|
Sapacitabine in solid tumor indications |
Cyclacel may continue to fund certain additional programs pending the availability of clinical
data, at which time the Company will determine the feasibility of pursuing advanced development
including:
|
|
|
Seliciclib in nasopharyngeal cancer or NPC; |
|
|
|
|
Seliciclib in non small-cell lung cancer or NSCLC; and |
|
|
|
|
CYC116 in patients with solid tumors |
As a development stage company, substantially all efforts of the Company to date have been devoted
to performing research and development, conducting clinical trials, developing and acquiring
intellectual properties, raising capital and recruiting and training personnel. The Company was
incorporated in the state of Delaware in 1996 and is headquartered in Berkeley Heights, New Jersey,
with research facilities located in the United Kingdom.
The condensed consolidated balance sheets as of September 30, 2008, the condensed consolidated
statements of operations for the three and nine months ended September 30, 2008 and 2007 and the
condensed consolidated statements of cash flows for the nine months ended September 30, 2008 and
2007, and related disclosures contained in the accompanying notes are unaudited. The condensed
consolidated balance sheet as of December 31, 2007 is derived from the audited consolidated
financial statements included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, filed with the Securities and Exchange Commission (the SEC). The condensed
consolidated financial statements are presented on the basis of accounting principles that are
generally accepted in the United States for interim financial information and in accordance with
the rules and regulations of the SEC. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United States for a complete
set of financial statements. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the condensed consolidated balance sheet
as of September 30, 2008, the results of operations for the three and nine months ended September
30, 2008 and 2007 and the consolidated statements of cash flows for the nine months ended September
30, 2008 and 2007 have been made. The interim results for the nine months ended September 30, 2008
are not necessarily indicative of the results to be expected for the year ending December 31, 2008
or for any other year. The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the accompanying notes for the
year ended December 31, 2007, included in the Companys Annual Report on Form 10-K filed with the
SEC.
7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries for the indicated periods. All significant intercompany
transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and related disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Cyclacel reviews its estimates on an ongoing basis. The estimates were based on
historical experience and on various other assumptions that the Company believes to be reasonable
under the circumstances. Actual results may differ from these estimates. Cyclacel believes the
judgments and estimates required by the following accounting policies to be critical in the
preparation of the Companys condensed consolidated financial statements.
Cash and Cash Equivalents
Cash equivalents are stated at cost when purchased, which is substantially the same as market
value. The Company considers all highly liquid investments with an original maturity of three
months or less at the time of initial deposit to be cash equivalents. The objectives of the
Companys cash management policy are the safety and preservation of funds, liquidity sufficient to
meet Cyclacels cash flow requirements and attainment of a market rate of return.
Inventory
Cyclacel values inventories at lower of cost or market value. The Company determines cost using the
first-in, first-out method. The Company analyzes its inventory levels quarterly and writes-down
inventory that becomes obsolete or that has a cost basis in excess of its expected net realizable
value. Expired inventory is disposed of and the related carrying amounts are written off. If actual
market conditions are less favorable than those projected by management, additional inventory
write-downs may be required in future periods.
Goodwill
Goodwill represents the difference between the purchase price and the fair value of net tangible
and identifiable intangible assets acquired in a business combination. Goodwill acquired in a
business combination is not amortized, but instead is tested for impairment at least annually in
accordance with the provisions of Statement of Financial Accounting Standards (FAS) FAS No.
142, Goodwill and Other Intangible Asset (FAS 142).
To test for impairment, the Company must compare the fair value of its reporting units to their
respective carrying values, including assigned goodwill. The Company has determined that it has one
reportable segment with two reporting units; ALIGN and Xcyte Therapies, Inc. (Xcyte). To the extent the carrying amount of the reporting units exceeds its fair value;
Cyclacel would be required to perform the second step of the impairment analysis, as this is an
indication that the component of goodwill may be impaired. In this second step, Cyclacel compares
the implied fair value of goodwill with its carrying amount. The implied fair value of goodwill is determined by allocating the fair value of the
reporting units to all of the assets (recognized and unrecognized) and
liabilities of the reporting units in a
manner similar to a purchase price allocation, in accordance with FAS No. 141 Business
Combinations. The residual fair value after this allocation represents the implied fair value of
the goodwill. To the extent the implied fair value of goodwill is
less than its carrying amount Cyclacel would be required to recognize an impairment loss.
The
fair value of the Companys two reporting units is determined in the
case of Xcyte by the fair
market value of Cyclacels outstanding common stock, preferred stock and common stock warrants and in the
case of
ALIGN by using the income based valuation approach with respect to
projected product values.
8
The
Company tested goodwill for impairment for both Xcyte and ALIGN, as
of September 30, 2008. The review resulted in an impairment
charge of $2.7 million for the three months ended
September 30, 2008 for the Xcyte reporting unit. This was as a
result of Cyclacels market capitalization being lower than the book
value of its constituent assets and liabilities as a result of
Cyclacels decreased stock price. For the three months ended September 30, 2007, there was no impairment
charge required with regard to Xcyte. For the three months ended September 30, 2008 there was no
impairment charge required for the ALIGN reporting unit.
Intangibles
As part of the acquisition of ALIGN, (see Note 5), the Company acquired rights to a license
agreement with Sinclair Pharma PLC (Sinclair) as well as to various customer relationships.
The license agreement allows Cyclacel to exclusively sell and distribute Xclair® Cream, Numoisyn
Liquid and Numoisyn Lozenges in the United States. The Company amortizes the license agreement
and customer relationship intangible assets over the remaining life of the contract of
approximately seven years. The fair values ascribed to the license agreements and customer
relationships on October 5, 2007, the acquisition date, were $3.0 million and $0.5 million,
respectively. For the three months ended September 30, 2008, the Company amortized approximately
$0.1 million and $17,000 for the license agreement and customer relationships, respectively. For
the nine months ended September 30, 2008, the Company amortized approximately $0.3 million and $0.1
million for the license agreement and customer relationships, respectively. The Company expects to
amortize $0.5 million annually for these intangible assets until June 2015.
As part of the acquisition of ALIGN, the Company assumed all rights to the ALIGN trade name, as
well as non-compete agreements signed between ALIGN and its senior managers and a beneficial
contract pricing arrangement. The Company amortizes the fair values of these assets acquired in the
ALIGN acquisition over 2 years, which represents the approximate time period that the non-compete
agreements will remain in effect based on the employment contracts of the existing ALIGN management
team. The fair value ascribed to the non-compete agreements, trade name and beneficial contract
pricing arrangement on October 5, 2007 was $0.4 million, $0.1 million and $0.5 million,
respectively. During the three months ended September 30, 2008, the Company amortized approximately
$49,000 for the non-compete agreements, $13,000 for the trade name and approximately $59,000 for
the beneficial pricing contract. During the nine months ended September 30, 2008, the Company
amortized approximately $0.1 million for the non-compete agreements, $38,000 for the trade name and
$0.2 million for the beneficial pricing contract.
As part of the Companys annual impairment analysis during the third quarter of 2008, it was
determined that the intangible assets described above, when treated as an asset group in accordance
with FAS No. 144, Accounting for the impairment or Disposal of Long-Lived Assets (FAS 144),
were not recoverable as the sum of the undiscounted cash flows was lower than the carrying value and
therefore should be impaired. Consequently the fair value of these
assets was determined by using the income based valuation
methodology. This resulted in the requirement to recognize an
impairment charge of $3.6 million. There will be no further amortization with respect to the intangible
assets ascribed in the asset acquisition of ALIGN.
Impairment of Long-lived Assets
In accordance with the provisions of FAS 144, the Company reviews long-lived assets, including
intangibles, property, plant and equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under
FAS 144, impairment occurs when undiscounted estimated identifiable future cash flows expected to
result from the use of the asset and its eventual dispositions are less than its carrying amount.
An impairment loss, if any, is measured as the amount by which the carrying amount of a long-lived
asset exceeds its fair value.
As a result of the Company announcing a restructuring plan in September 2008, the Company
identified that certain research and development assets at its Cambridge, UK facility will no
longer be utilized (see footnote 2 Restructuring Expenses). For the three months ended September
30, 2008, the Company
recorded an asset impairment of $0.1 million in respect to these assets and it was included as
part of restructuring costs on the consolidated statement of operations in accordance with FAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities (FAS 146).
9
Revenue Recognition
Product sales
The Company recognizes revenue from product sales when persuasive evidence of an arrangement
exists; delivery has occurred or services have been rendered; the selling price is fixed and
determinable; and collectability is reasonably assured.
The Company offers a general right of return on these product sales, and has considered the
guidance in FAS No. 48, Revenue Recognition When Right of Return Exists (FAS 48) and Staff
Accounting Bulletin No. 104 Revenue Recognition (SAB 104). Under these pronouncements, the
Company accounts for all product sales using the sell-through method. Under the sell-through
method, revenue is not recognized upon shipment of product to distributors. Instead, the Company
records deferred revenue at gross invoice sales price and deferred cost of sales at the cost at
which those goods were held in inventory. The Company recognizes revenue when such inventory is
sold through to the end user based upon prescriptions filled. To estimate product sold through to
end users, the Company relies on third-party information, including information obtained from
third-party market research data as well as from distributors with respect to their inventory
levels and sell-through to customers.
Collaboration, research and development, and grant revenue
Certain of the Companys revenues are earned from collaborative agreements. The Company recognizes
revenue when persuasive evidence of an arrangement exists; delivery has occurred or services have
been rendered; the fee is fixed and determinable; and collectability is reasonably assured.
Determination of whether these criteria have been met is based on managements judgments regarding
the nature of the research performed, the substance of the milestones met relative to those the
Company must still perform, and the collectability of any related fees. Should changes in
conditions cause management to determine these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely affected.
Research and development revenues, which are earned under agreements with third parties for
contract research and development activities, are recorded as the related services are performed.
Milestone payments are non-refundable and recognized as revenue when earned, as evidenced by
achievement of the specified milestones and the absence of ongoing performance obligations. Any
amounts received in advance of performance are recorded as deferred revenue. None of the revenues
recognized to date are refundable if the relevant research effort is not successful.
Grant revenues from government agencies and private research foundations are recognized as the
related qualified research and development costs are incurred, up to the limit of the prior
approval funding amounts. Grant revenues are not refundable.
Clinical Trials Accounting
Data management and monitoring of all of the Companys clinical trials are performed by contract
research organizations (CROs) or clinical research associates (CRAs) in accordance with the
Companys standard operating procedures. Typically, CROs and some CRAs bill monthly for services
performed, and others bill based upon milestones achieved. For outstanding amounts, the Company
accrues unbilled clinical trial expenses based on estimates of the level of services performed each
period. Costs of setting up clinical trial sites for participation in the trials are expensed
immediately as research and development expenses. Clinical trial site costs related to patient
enrollment are accrued as patients are entered into the trial and any initial payment made to the
clinical trial site is recognized upon execution of the clinical trial agreements and expensed as
research and development expenses.
10
Research and Development Expenditures
Research and development expenses consist primarily of clinical trial costs associated with the
Companys product candidates, milestones, compensation and other expenses for research and
development personnel, supplies and development materials, costs for consultants and related
contract research, facility costs, amortization of purchased technology and depreciation.
Expenditures relating to research and development are expensed as incurred.
Foreign Currency
The results of operations for our one foreign subsidiary, located in the United Kingdom, are
maintained in the local currency and translated using the average exchange rates during the period.
Assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the
balance sheet date. The resulting translation adjustments are reflected on the consolidated balance
sheet in stockholders equity as a cumulative foreign currency translation adjustment, a component
of accumulated other comprehensive income (loss). Gains and losses from foreign currency
transactions are included in the accompanying consolidated statements
of operations.
For
the three months ended September 30, 2008, a foreign exchange loss of $4.8 million
was recorded on intercompany loans due to the strength of the US dollar against the British pound
and is shown on the consolidated statement of operations under other income (expense). In prior
years the foreign exchange gain or loss was shown as selling, general and administrative
expense. The Company re-classified the foreign exchange loss due to
the loan being of a financing nature rather than it being related to the operating activities of the
business and also the magnitude of the charges. For the three months ended September 30, 2007, the
Company recorded foreign exchange gain of $0.5 million.
Segments
The Company is organized and managed as a single operating segment.
Supplemental Financial Information:
Loss per Share
Basic and diluted loss per share is computed by dividing loss attributable to common stockholders
by the weighted average number of shares of common stock outstanding during the period. Diluted
weighted average shares outstanding excludes shares underlying stock options; convertible preferred
stock; make-whole dividend payments of common stock on convertible preferred stock and common stock
warrants, since the effects would be anti-dilutive. Accordingly, basic and diluted loss per share
is the same. Such excluded shares are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
Stock options |
|
|
1,968,915 |
|
|
|
2,743,963 |
|
Convertible preferred stock |
|
|
870,980 |
|
|
|
870,980 |
|
Make-whole dividend payments of common
stock on convertible preferred stock |
|
|
190,608 |
|
|
|
|
|
Common stock warrants |
|
|
3,634,703 |
|
|
|
3,809,272 |
|
|
|
|
|
|
|
|
Total shares excluded from calculation |
|
|
6,665,206 |
|
|
|
7,424,215 |
|
|
|
|
|
|
|
|
Other Comprehensive Loss
In accordance with FAS No. 130, Reporting Comprehensive Income, all components of comprehensive
income (loss), including net income (loss), are reported in the financial statements in the period
in which they are recognized. Comprehensive income (loss) is defined as the change in equity during
a period from transactions and other events and circumstances from non-owner sources. Net income
(loss) and other
comprehensive income (loss), including foreign currency translation adjustments and changes in the
fair value of available-for-sale securities, are reported, net of any related tax effect, to arrive
at comprehensive income (loss).
11
Short-term Investments
The following is a summary of short-term investments at December 31, 2007 and September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
amortized |
|
|
unrealized |
|
|
unrealized |
|
|
|
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
Fair value |
|
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
Federal agency obligations & municipal bonds |
|
|
9,354 |
|
|
|
|
|
|
|
|
|
|
|
9,354 |
|
Corporate bonds & commercial paper |
|
|
18,390 |
|
|
|
24 |
|
|
|
(2 |
) |
|
|
18,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,744 |
|
|
|
24 |
|
|
|
(2 |
) |
|
|
27,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
amortized |
|
|
unrealized |
|
|
unrealized |
|
|
|
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
Fair value |
|
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
Federal agency obligations & municipal bonds |
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
500 |
|
Corporate bonds & commercial paper |
|
|
6,499 |
|
|
|
3 |
|
|
|
(4 |
) |
|
|
6,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,999 |
|
|
|
3 |
|
|
|
(4 |
) |
|
|
6,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For investments that are in an unrealized loss position, the Company has evaluated the nature of
the investments, the duration of the impairments and concluded that the impairments are not
other-than-temporary.
At September 30, 2008, all investments have contractual maturities due within one year. At December
31, 2007 investments of $1.5 million had maturities greater than one year.
Fair value measurements
On January 1, 2008, the Company adopted FAS No. 157, Fair Value Measurements (FAS 157), for
its financial assets and liabilities. The Companys adoption of FAS 157 did not materially affect
the Companys financial position, results of operations or liquidity. In accordance with FASB Staff
Position No. 157-2, Effective Date of FAS 157, the Company elected to defer until January 1,
2009 the adoption of FAS 157 for all non-financial assets and non-financial liabilities that are
not recognized or disclosed at fair value in the financial statements on a recurring basis. As
defined in FAS 157, fair value is based on the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. In order to increase consistency and comparability in fair value measurements,
FAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used
to measure fair value into three broad levels, which are described below:
|
|
|
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs. |
|
|
|
|
Level 2: Inputs other than quoted prices within Level 1 that are observable for the
asset or liability, either directly or indirectly |
|
|
|
|
Level 3: Unobservable inputs that are used when little or no market data is available.
The fair value hierarchy gives the lowest priority to Level 3 inputs. |
12
In determining fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible as well as
considers counterparty credit risk in its assessment of fair value.
Financial assets and liabilities carried at fair value as of September 30, 2008 are classified in
the table below in one of the three categories described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities |
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper |
|
|
|
|
|
|
2,991 |
|
|
|
|
|
|
|
2,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds |
|
|
|
|
|
|
3,507 |
|
|
|
|
|
|
|
3,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
|
|
|
|
|
6,998 |
|
|
|
|
|
|
|
6,998 |
|
|
Warrants |
|
|
|
|
|
|
(224 |
) |
|
|
|
|
|
|
(224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
|
|
|
|
|
(224 |
) |
|
|
|
|
|
|
(224 |
) |
Prepaid expenses and other current assets:
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
|
($000s) |
|
Research and development tax credit receivable |
|
|
2,467 |
|
|
|
1,644 |
|
Prepayments |
|
|
1,741 |
|
|
|
1,234 |
|
Other current assets |
|
|
603 |
|
|
|
139 |
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets |
|
|
4,811 |
|
|
|
3,017 |
|
|
|
|
|
|
|
|
13
Accrued Liabilities and Other Current Liabilities:
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
|
($000s) |
|
Accrued research and development |
|
|
3,681 |
|
|
|
4,449 |
|
Other accrued liabilities |
|
|
334 |
|
|
|
1,261 |
|
|
|
|
|
|
|
|
Total accrued liabilities |
|
|
4,015 |
|
|
|
5,710 |
|
|
|
|
|
|
|
|
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
|
($000s) |
|
Payroll provision |
|
|
308 |
|
|
|
114 |
|
Preferred stock dividends declared |
|
|
307 |
|
|
|
307 |
|
Deferred consideration payable in common stock |
|
|
250 |
|
|
|
279 |
|
Other short term payables |
|
|
|
|
|
|
585 |
|
Other current liabilities |
|
|
414 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
|
1,279 |
|
|
|
1,291 |
|
|
|
|
|
|
|
|
Restructuring Expense
The Company records costs and liabilities associated with exit and disposal activities, when
certain criteria have been met in accordance with FAS 146, at fair value in the period the
liability is incurred. The Companys restructuring and integration plan is subject to continued
future refinement as additional information becomes available.
On September 16, 2008, the Company announced a revision of its operating plan and that it plans to
concentrate its resources on the advancement of its lead drug, sapacitabine, while maintaining the
Companys core competency in drug discovery and cell cycle biology. The plan reduced the workforce
across all locations by 25 people. For the three months ended September 30, 2008, the Company
recorded an accrual of approximately $0.4 million for severance payments. As part of the plan the
Company will vacate its laboratory facility in Cambridge, England, whose lease terminates in
January 2011. For the three months ended September 30, 2008, the rent expense was $32,000.
An
asset impairment amounting to $0.1 million was also charged to the consolidated statement
of operations as a result of assets being identified that would no longer be utilized.
3. STOCK BASED COMPENSATION
At the Companys annual shareholder meeting on May 14, 2008, the stockholders approved and amended
the number of shares reserved under the 2006 Equity Incentive Plan (2006 Plan) to 5,200,000
shares of the Companys common stock (up from 3,000,000 shares). The shares reserved under the 2006
Plan have a maximum maturity of 10 years and generally vest over a four-year period from the date
of grant.
14
A summary of activity for the options under the Companys 2006 Plan for the nine months ended
September 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Exercise Price |
|
|
Term (years) |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Options outstanding at December 31, 2007 |
|
|
2,592,246 |
|
|
$ |
6.39 |
|
|
|
9.1 |
|
|
|
|
|
Granted |
|
|
325,000 |
|
|
$ |
3.79 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled / forfeited |
|
|
(173,283 |
) |
|
$ |
6.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2008 |
|
|
2,743,963 |
|
|
$ |
6.09 |
|
|
|
8.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2008 |
|
|
1,531,254 |
|
|
$ |
5.60 |
|
|
|
8.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at September 30, 2008 |
|
|
1,212,709 |
|
|
$ |
6.72 |
|
|
|
7.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for all share-based payment transactions under FASB, Statement No. 123R,
Share-Based Payment (FAS 123R). FAS 123R requires the Company to measure all share-based
payment awards, including those with employees, granted, modified, repurchased or cancelled after,
or that were unvested as of, January 1, 2006 at fair value. Under FAS 123R, the fair value of stock
options and other equity-based compensation must be recognized as compensation cost in the
financial statements over the requisite service period of each award.
The Company used the Black-Scholes option-pricing model with the following assumptions for stock
option grants to employees and directors for the nine months ended September 30, 2007 and 2008:
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
September 30, |
|
|
2007 |
|
2008 |
Expected term |
|
4.25 6 Yrs |
|
1 6 Yrs |
Risk free interest rate |
|
4.25 5.07% |
|
2.15 3.76% |
Expected volatility |
|
70 80% |
|
45 75% |
Expected dividend yield over expected term |
|
|
|
|
Resulting weighted average grant fair value |
|
$4.05 |
|
$2.11 |
The expected term assumption was estimated using past history of early exercise behavior and
expectations about future behavior.
The forfeiture rates have been reviewed and updated to reflect a representative level of employee
turnover given market conditions and the current business climate.
The expected volatility assumption was based on the historical volatility of the Companys common
stock since the merger with Xcyte on March 27, 2006 together with an analysis of the historical
volatilities of a peer group of similar biotechnology companies.
The weighted average risk-free interest rate represents interest rate for treasury constant
maturities published by the Federal Reserve Board. If the term of available treasury constant
maturity instruments is not equal to the expected term of an employee option, the Company uses the
weighted average of the two Federal Reserve securities closest to the expected term of the employee
option.
Dividend yield has been assumed to be zero as (a) the Company has never declared or paid any
dividends and (b) does not currently anticipate paying any cash dividends on its outstanding shares
of common stock in the foreseeable future.
There were no exercises of stock options during the three and nine months ended September 30, 2008.
The Company received $0.2 million from the exercise of 25,508 stock options during the second
quarter of 2007. As the Company presently has tax loss carry forwards from prior periods and
expects to incur tax
losses in 2008, the Company is not able to benefit from the deduction for exercised stock options
in the current reporting period.
15
Cash used to settle equity instruments granted under share-based payment arrangements amounted to
$0 during all periods presented.
In accordance with the terms of a retirement agreement with a former employee, the Company agreed
to extend the period during which he would be entitled to exercise vested stock options to purchase
Cyclacels common stock from 30 (thirty) days following the effective date of his retirement,
January 8, 2008, to 36 (thirty six) months following such effective date. The Company recorded a
one time compensation expense related to the modification of the exercise period of $0.1 million
for the three months ended March 31, 2008.
The following table summarizes the components of the Companys stock based compensation for the
three and nine months ended September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
|
($000s) |
|
|
($000s) |
|
Research and development |
|
|
120 |
|
|
|
127 |
|
|
|
622 |
|
|
|
548 |
|
General and administrative |
|
|
199 |
|
|
|
127 |
|
|
|
713 |
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation costs before income taxes |
|
|
319 |
|
|
|
254 |
|
|
|
1,335 |
|
|
|
1,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. COMMITMENTS AND CONTINGENCIES
In 2005, the Company recorded an accrued restructuring liability associated with abandoning the
facility in Bothell, Washington. The lease term on this space expires December 2010. The Bothell
restructuring liability was computed as the present value of the difference between the remaining
lease payments due less the estimate of net sublease income and expenses. The accrual balance was
adjusted in 2006 to reflect a change in estimate due to continued deterioration in the local real
estate market. As of September 30, 2008, the Bothell accrued restructuring liability was $2.3
million. This represents the Companys best estimate of the fair value of the liability. Subsequent
changes in the liability due to accretion, or changes in estimates of sublease assumptions, etc.
will be recognized as adjustments to restructuring charges in future periods.
The Company records payments of rent related to the Bothell facility as a reduction in the amount
of the accrued restructuring liability. Accretion expense is recognized due to the passage of time,
which is also reflected as a restructuring charge. Based on our current projections of estimated
sublease income and a discount rate of 7.8%, the Company expects to record additional accretion
expense of approximately $0.2 million over the remaining term of the lease.
As a
result of the Company announcing a restructuring plan in
September 2008 it created an additional
restructuring accrual of $0.4 million was recorded in connection with the severance payments that it made during
October 2008. (see Restructuring Expense under footnote 2) The total restructuring accrual can be
summarized at September 30, 2008 as follows:
|
|
|
|
|
|
|
$000s |
|
|
|
|
|
|
Restructuring provision at June 30, 2008 |
|
|
2,554 |
|
|
|
|
|
|
Restructuring expense for the current period |
|
|
383 |
|
|
|
|
|
|
Payments made in the period |
|
|
(227 |
) |
|
|
|
|
|
As of September 30, 2008 |
|
|
2,710 |
|
|
|
|
|
|
Less: amounts due within one year |
|
|
1,349 |
|
|
|
|
|
|
Other accrued restructuring charges long term |
|
|
1,361 |
|
16
In connection with the abandonment of the Bothell facility and the related sale of assets in late
2005, the Company has been subjected to a State sales tax audit by the Department of Revenue of the
State of Washington. As a result of the potential State sales tax assessment, the Company recorded
a liability of $0.3 million during 2006. There has been no change in the Companys assessment of
the liability during the three months ended September 30, 2008.
5. ACQUISITIONS
Acquisition of ALIGN
On October 5, 2007, the Company purchased certain net assets of ALIGN Pharmaceuticals, LLC or
ALIGN. As part of the asset purchase, the Company acquired the sellers exclusive rights to sell
and distribute three products in the United States used primarily to manage the effects of
radiation or chemotherapy in cancer patients: Xclair® Cream, Numoisyn Liquid and Numoisyn
Lozenges. The acquired business provides Cyclacel with the foundation to build a commercial
organization focused on cancer that is complementary to Cyclacels oncology/hematology products in
development and is part of Cyclacels strategy to build a diversified biopharmaceutical business.
Under the terms of the asset purchase agreement, the Company (i) paid approximately $3.3 million in
cash to the sellers at closing, plus approximately $0.5 million to be used to pay certain creditors
of the sellers, and (ii) agreed to issue up to a maximum aggregate of 184,176 shares of the
Companys common stock, or the Stock Consideration, as consideration for the asset purchase. 46,044
shares of the Stock Consideration are issuable on the first anniversary of the closing date, and
the balance is issuable in two tranches upon achievement of certain operational and financial
milestones (in all cases, subject to satisfaction of any outstanding indemnification obligations of
the sellers). The Company has already determined that 46,044 shares of the Stock Consideration will
not be issued due to the sellers failure to achieve the first of the two milestones. The Company
is reviewing certain indemnity issues which may be satisfied pursuant to the terms
of the asset purchase agreement. The final 92,088 shares
of the Stock Consideration is issuable if the sellers meet certain financial milestones as of
December 31, 2008. The Company is also committed, as part of securing long term supply
arrangements, to make future payments of approximately $0.6 million in 2009 and $0.7 million in
2010. The present value of these commitments has been reported as other short term payables and
other long term payables on the condensed consolidated balance sheets as of September 30, 2008.
The transaction was accounted for as a business combination and the consolidated results of
operations of Cyclacel include the results of operations of ALIGN from October 5, 2007. The assets
and certain agreed liabilities of ALIGN have been recorded, as of the closing date, at their
estimated fair values.
Acquisition Purchase Price
The purchase price paid to acquire the Sellers assets was calculated as follows (in thousands):
|
|
|
|
|
Cash and equity |
|
$ |
3,571 |
|
Acquisition costs |
|
|
432 |
|
|
|
|
|
Total purchase price |
|
$ |
4,003 |
|
|
|
|
|
17
Acquisition Purchase Price Allocation
As part of the acquisition, the following net assets were acquired (in thousands):
|
|
|
|
|
Current assets |
|
$ |
199 |
|
Property, plant and equipment |
|
|
10 |
|
Intangible assets |
|
|
4,495 |
|
Current liabilities |
|
|
(1,409 |
) |
Non-current liabilities |
|
|
(1,122 |
) |
Goodwill |
|
|
1,830 |
|
|
|
|
|
|
|
$ |
4,003 |
|
|
|
|
|
Pro Forma Results of Operations
The results of operations of ALIGN are included in Cyclacels condensed consolidated financial
statements from the date of the business combination transaction as of October 5, 2007. The
following table presents pro forma results of operations and gives effect to the business
combination transaction as if the business combination was consummated at January 1, 2007. The
unaudited pro forma results of operations are not necessarily indicative of what would have
occurred had the business combination been completed at the beginning of the retrospective periods
or of the results that may occur in the future.
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2007 |
|
|
|
(000s) |
|
|
(000s) |
|
Revenue |
|
|
218 |
|
|
|
754 |
|
Loss before taxes |
|
|
(5,463 |
) |
|
|
(16,620 |
) |
Net loss applicable to ordinary shareholders |
|
|
(5,030 |
) |
|
|
(15,071 |
) |
|
|
|
|
|
|
|
Net loss per share-basic and diluted |
|
$ |
(0.25 |
) |
|
$ |
(0.77 |
) |
|
|
|
|
|
|
|
Weighted average shares |
|
|
20,433,129 |
|
|
|
19,685,457 |
|
Acquisition of Xcyte Therapies Inc.
On March 27, 2006, Xcyte Therapies Inc. (Xcyte) completed a Stock Purchase Agreement (the Stock
Purchase Agreement) with Cyclacel Group plc (Group), a public company organized under the laws
of England and Wales in which Xcyte agreed to purchase from Group all of the capital stock of
Cyclacel Limited (Limited), a private limited company organized under the laws of England and
Wales and a wholly-owned subsidiary of Group (the Stock Purchase). For more information please
see the Companys Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the
SEC.
6. STOCKHOLDERS EQUITY
Preferred stock
On November 3, 2004, the Company completed a public offering of 2,990,000 shares of its 6%
convertible exchangeable preferred stock (the Preferred Stock) at $10.00 per share, including the
shares sold to the underwriters pursuant to the over-allotment option granted in connection with
the offering. Net proceeds from the offering, after deducting underwriting discounts and
offering-related expenses, totaled $27.5 million.
18
Dividends on the Preferred Stock are cumulative from the date of original issue at the annual rate
of 6% of the liquidation preference of the Preferred Stock, payable quarterly on the first day of
February, May, August and November, commencing February 1, 2005. Any dividends must be declared by
the Companys board of directors and must come from funds that are legally available for dividend
payments. The Preferred
Stock has a liquidation preference of $10 per share, plus accrued and unpaid dividends. In December
2007 as well as April and July 2008 the Companys Board of Directors declared quarterly dividends
in the amount of $0.15 per share of Preferred Stock, which were paid on the first business day in
February, May and August 2008, respectively. Each quarterly dividend distribution totaled $0.3
million and was paid to holders of record as of the close of business on January 18, April 18, and
July 8, 2008 respectively. On September 4, 2008 a dividend was declared and subsequently paid on
October 31, 2008.
The Preferred Stock is convertible at the option of the holder at any time into the Companys
common stock at a conversion rate of approximately 0.42553 shares of common stock for each share of
Preferred Stock, based on a conversion price of approximately $23.50. The Company has reserved
870,980 shares of common stock for issuance upon conversion of the remaining shares of Preferred
Stock outstanding as of September 30, 2008. In each of the three month periods ended September 30,
2007 and 2008, no shares of preferred stock were converted into common stock.
The Company may automatically convert the Preferred Stock into common stock if the closing price of
the Companys common stock has exceeded $35.30, which is 150% of the conversion price of the
Preferred Stock, for at least 20 trading days during any 30-day trading period, ending within five
trading days prior to notice of automatic conversion.
The Company and the holders elected not to automatically convert some or all of the Preferred Stock
into common stock prior to November 3, 2007. If they had done so, the Company would have made an
additional payment on the Preferred Stock equal to the aggregate amount of dividends that would
have been payable on the Preferred Stock through November 3, 2007, less any dividends already paid
on the Preferred Stock. This additional payment would have been payable in cash or, at the
Companys option, in shares of the Companys common stock, or a combination of cash and shares of
common stock. As of September 30, 2008, the Company issued 81,927 shares of common stock to
converting holders in satisfaction of this additional payment. During the three months ended
September 30, 2008, no shares of the Companys common stock were issued.
In accordance with FASB 133, Accounting for Derivative Instruments (FAS 133), the Company
was required to separate and account for, as an embedded derivative, the dividend make-whole
payment feature of the Preferred Stock. As an embedded derivative instrument, the dividend
make-whole payment feature was measured at fair value and reflected as a liability. Changes in the
fair value of the derivative were recognized in the condensed consolidated statement of operations
as a component of other income (expense). The derivative liability was reduced to $0 as of November
2, 2007, the last date of possible conversion. During the three and nine months ended September 30,
2007, the Company recorded a charge of $19,000 and $0.1 million, respectively, on the consolidated
statement of operations as other expense.
The Company may elect to redeem the Preferred Stock at declining redemption prices on or after
November 6, 2007. The Preferred Stock is exchangeable, in whole but not in part, at the option of
the Company on any dividend payment date beginning on November 1, 2005 (the Exchange Date) for
the Companys 6% Convertible Subordinated Debentures (Debentures) at the rate of $10 principal
amount of Debentures for each share of Preferred Stock. The Debentures, if issued, will mature 25
years after the Exchange Date and have terms substantially similar to those of the Preferred Stock.
In order to conserve cash, the company may elect not to pay the quarterly preference dividend
relating to the preference stock in future periods. The dividend would continue to be accrued
within the financial statements but would result in annualized cash savings of approximately $1.2
million. If the Company implemented this course of action then the preference stock holders would
have the right to appoint two non executives to the Board after non payment of dividends in two
consecutive quarters.
The Preferred Stock has no maturity date and no voting rights prior to conversion into common
stock, except under limited circumstances.
19
Common Stock and warrants
February 2007 Registered Direct Offering
On February 16, 2007, the Company raised $36.0 million in gross proceeds, before deducting
placement agent fees and offering expenses of $2.6 million, in a registered direct offering
through the sale of shares of the Companys common stock and warrants. The Company entered into
subscription agreements with these investors pursuant to which it sold approximately 4.2 million
units, each unit consisting of one share of common stock and a seven-year warrant to purchase 0.25
shares of common stock, at a purchase price of $8.47125 per unit. The purchase price for the shares
and the exercise price for the warrants was $8.44 per share, the closing bid price for the
Companys common stock on February 12, 2007. Investors paid $0.125 per warrant. The Company issued
4,249,668 shares of common stock and warrants to purchase 1,062,412 shares of common stock.
The warrants issued to the investors are being accounted for as a liability in accordance with
Emerging Issues Task Force (EITF) 00-19, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19). At the date of
the transaction, the fair value of the warrants of $6.8 million was determined utilizing the
Black-Scholes option pricing model utilizing the following assumptions: risk free interest rate
4.58%, expected volatility 85%, expected dividend yield 0%, and a remaining contractual life
of 6.88 years. The value of the warrant shares is being marked to market each reporting period as a
derivative gain or loss on the consolidated statement of operations until exercised or expiration.
At September 30, 2008, the fair value of the warrants was $0.2 million. For the three months ended
September 30, 2007 and 2008, the Company recognized the change in the value of warrants of
approximately $1.0 million and $0.4 million, respectively, as a gain on the consolidated statement
of operations. For the nine months ended September 30, 2007 and 2008, the Company recognized the
change in the value of warrants of approximately $2.8 million and $3.3 million, respectively, as a
gain on the consolidated statement of operations. Since the date of the transaction, the Company
recognized the change in the value of warrants of approximately $6.5 million.
December 2007 Committed Equity Financing Facility
On December 10, 2007, Cyclacel entered into a Committed Equity Financing Facility or CEFF, with
Kingsbridge Capital Limited or Kingsbridge, a private investment group, in which Kingsbridge
committed to purchase the lesser of 4,084,590 shares of common stock or $60 million of common stock
from Cyclacel capital during the next three years. Under the terms of the agreement, Cyclacel will
determine the exact timing and amount of any CEFF financings, subject to certain conditions. All
amounts drawn down under the CEFF will be settled via the issuance of registered shares of
Cyclacels common stock. Cyclacel may access capital under the CEFF in tranches of either (a) 2% of
Cyclacels market capitalization at the time of the draw down or (b) the lesser of (i) 3% of
Cyclacels market capitalization at the time of the draw down and (ii) an alternative draw down
amount based on the product of (A) the average trading volume of the 30-day trading period
preceding the draw down excluding the five highest and five lowest trading days during such period,
(B) the volume-weighted average trading price (VWAP) on the trading day prior to the notice of
draw down, (C) the number of days during the draw down period and (D) 85%, subject to certain
conditions. Each tranche will be issued and priced over an eight-day pricing period. Kingsbridge
will purchase shares of common stock pursuant to the CEFF at discounts ranging from 6% to 10%
depending on the average market price of the common stock during the eight-day pricing period,
provided that the minimum acceptable purchase price for any shares to be issued to Kingsbridge
during the eight-day period is determined by the higher of $2.50 or 90% of Cyclacels common stock
closing price the day before the commencement of each draw down. Cyclacel currently is unable to
draw down on the CEFF because the Companys common stock is trading below the $2.50 per share
floor price set forth in the CEFF.
In connection with the CEFF, Cyclacel issued a warrant to Kingsbridge to purchase up to 175,000
shares of common stock at an exercise price of $7.17 per share which represents a 30% premium over
the average of the closing bid prices of Cyclacels common stock during the 5 trading days
preceding the signing of the agreement. The warrant will become exercisable six months from the
date of the agreement and will remain exercisable, subject to certain exceptions, for a period of
five years thereafter. As of September 30, 2008,
the warrants issued to the investors have been classified as equity in accordance with EITF 00-19.
The transaction date fair value of the warrants of $0.6 million was determined utilizing the
Black-Scholes option pricing model utilizing the following assumptions: risk free interest rate
3.605%, expected volatility 70%, expected dividend yield 0%, and a remaining contractual life
of 5.5 years.
20
Common Stock Warrants
The following table summarizes information about warrants outstanding at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Expiration |
|
|
Common Shares |
|
|
Average |
|
Issued in Connection With |
|
Date |
|
|
Issuable |
|
|
Exercise Price |
|
Acquisition of Xcyte March 2006 |
|
|
2009 |
|
|
|
431 |
|
|
|
15.29 |
|
March 2006 stock issuance |
|
|
2014 |
|
|
|
2,571,429 |
|
|
|
7.00 |
|
February 2007 stock issuance |
|
|
2014 |
|
|
|
1,062,412 |
|
|
|
8.44 |
|
December 2007 CEFF |
|
|
2012 |
|
|
|
175,000 |
|
|
|
7.17 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
3,809,272 |
|
|
$ |
7.41 |
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of Stock Options
There were no stock option exercises during the nine months ended September 30, 2008. During the
three months ended June 30, 2007, 25,508 shares of the Companys common stock were issued from the
exercise of stock options resulting in proceeds of $0.2 million.
7. INCOME TAXES
The Company accounts for income taxes under the liability method. Under this method, deferred tax
assets and liabilities are determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company applies FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes
(FIN 48) in accounting for uncertainty in income taxes recognized in a companys financial
statements. FIN 48 prescribes a minimum probability threshold a tax position is required to meet
before being recognized in the financial statements. It also provides guidance on de-recognition,
measurement, classification, interest and penalties, accounting in interim periods as well as
disclosure and transition.
Credit is taken in the accounting period for research and development tax credits, which will be
claimed from H. M. Revenue & Customs, the United Kingdoms taxation and customs authority, in
respect of qualifying research and development costs incurred in the same accounting period.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (FAS 159) which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be measured at
fair value. FAS 159 was effective on January 1, 2008 and the adoption of FAS 159 did not have a
material impact on the Companys condensed consolidated financial statements.
In December 2007, FASB ratified the consensus reached by Emerging Issues Task Force on (EITF)
Issue 07-1, Accounting for Collaborative Arrangements or (EITF 07-1). EITF 07-1 requires
collaborators to present the results of activities for which they act as the principal on a gross
basis and report any payments received from (made to) other collaborators based on other applicable
Generally Accepted Accounting Principles (GAAP) or, in the absence of other applicable GAAP,
based on analogy to authoritative accounting literature or a reasonable, rational, and consistently
applied accounting policy election. Further, EITF 07-1 clarified that the determination of whether
transactions within a collaborative
arrangement are part of a vendor-customer (or analogous) relationship subject to EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors
Products). EITF 07-1 was effective on January 1, 2008. The adoption of EITF 07-1 did not have a
material impact on the Companys consolidated financial statements.
21
In November 2007, the FASB issued FAS No. 141 (revised 2007), Business Combination (FAS 141(R))
and FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51(FAS 160). FAS 141(R) will change how business acquisitions are accounted for and
will impact financial statements both on the acquisition date and in subsequent periods. FAS 160
will change the accounting and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. FAS 141(R) and FAS 160 are
effective for both public and private companies for fiscal years beginning on or after December 15,
2008 (January 1, 2009 for the Company). FAS 141(R) will be applied prospectively. FAS 160 requires
retroactive adoption of the presentation and disclosure requirements for existing minority
interests. All other requirements of FAS 160 will be applied prospectively. Early adoption is
prohibited for both standards. The Company believes that the adoption of FAS 141(R) and FAS 160
will not have a material impact on its consolidated financial statements.
In June 2007, FASB ratified the consensus reached by the EITF on EITF Issue No. 07-3, Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities or (EITF 07-3). EITF 07-3 addresses the diversity that exists with
respect to the accounting for the non-refundable portion of a payment made by a research and
development entity for future research and development activities. Under EITF 07-3, an entity would
defer and capitalize non-refundable advance payments made for research and development activities
until the related goods are delivered or the related services are performed. EITF 07-3 is effective
for the Company beginning on January 1, 2008 and must be adopted on a prospective basis. Given a
review of our current contracts and arrangements the adoption of EITF 07-3 did not have a material
effect on the Companys consolidated financial statements.
On March 19, 2008, FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (FAS 161). FAS 161 requires enhanced financial disclosure about derivative
instruments and hedging activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entitys financial position, financial performance, and cash flows.
FAS 161 achieves these improvements by requiring disclosure of the fair values of derivative
instruments and their gains and losses in a tabular format. It also provides more information about
an entitys liquidity by requiring disclosure of derivative features that are credit riskrelated.
Finally, it requires cross-referencing within footnotes to enable financial statement users to
locate important information about derivative instruments. FAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company believes that the adoption of FAS161 will not have a
material impact on its consolidated financial statements.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act). We intend the forward-looking statements to be
covered by the safe harbor for forward-looking statements in such sections of the Exchange Act. The
forward-looking information is based on various factors and was derived using numerous assumptions.
All statements, other than statements of historical fact, that address activities, events or
developments that we intend, expect, project, believe or anticipate will or may occur in the future
are forward-looking statements. Such statements are based upon certain assumptions and assessments
made by our management in light of their experience and their perception of historical trends,
current conditions, expected future developments and other factors they believe to be appropriate.
These forward-looking statements are usually accompanied by words such as believe, anticipate,
plan, seek, expect, intend and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results
could differ materially from those anticipated in the forward looking statements due to a number of
factors, including those set forth in Part I, Item 1A Risk Factors of our Annual Report on Form
10-K for the year ended December 31, 2007, as updated and supplemented by Part II, Item 1A Risk
Factors of this Quarterly Report on Form 10-Q, and elsewhere in this report. These factors as well
as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and
understood as being applicable to all related forward-looking statements wherever they appear
herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent
our judgment as of the date hereof. We encourage you to read those descriptions carefully. We
caution you not to place undue reliance on the forward-looking statements contained in this report.
These statements, like all statements in this report, speak only as of the date of this report
(unless an earlier date is indicated) and we undertake no obligation to update or revise the
statements except as required by law. Such forward-looking statements are not guarantees of future
performance and actual results will likely differ, perhaps materially, from those suggested by such
forward-looking statements. In this report, Cyclacel, the Company, we, us, and
our refer to Cyclacel Pharmaceuticals, Inc.
Overview
We are a development stage biopharmaceutical company dedicated to the discovery, development and
commercialization of novel, mechanism-targeted drugs to treat human cancers and other serious
disorders. Our strategy is focused on leading edge therapeutic management of cancer patients based
on a portfolio of three products marketed by ALIGN Pharmaceuticals, LLC ALIGN, our subsidiary,
and a deep development pipeline.
We market directly in the United States Xclair® Cream for radiation dermatitis and
NumoisynTM Liquid and NumoisynTM Lozenges for xerostomia.
As a result of the recent revised operating plan announced on September 16, 2008, we are focusing
its clinical development priorities on:
|
|
|
Sapacitabine in acute myeloid leukemia in the elderly or AML; |
|
|
|
|
Sapacitabine in myelodysplastic syndromes or MDS; |
|
|
|
|
Sapacitabine in cutaneous T-cell lymphoma or CTCL; and |
|
|
|
|
Sapacitabine in solid tumor indications |
23
Cyclacel may continue to fund certain additional programs pending the availability of clinical
data, at which time the Company will determine the feasibility of pursuing advanced development
including:
|
|
|
Seliciclib in nasopharyngeal cancer or NPC; |
|
|
|
|
Seliciclib in non small-cell lung cancer or NSCLC; and |
|
|
|
|
CYC116 in patients with solid tumors |
We focus primarily on the discovery and development of orally available anticancer agents that
target the cell cycle with the aim of slowing the progression or shrinking the size of tumors, and
enhancing the quality of life and improving survival rates of cancer patients. We are generating
several families of anticancer drugs that act on the cell cycle including nucleoside analogues,
cyclin dependent kinase or CDK inhibitors and Aurora kinase/Vascular Endothelial Growth Factor
Receptor 2 or AK/VEGFR2 inhibitors. Although a number of pharmaceutical and biotechnology companies
are currently attempting to develop nucleoside analogues, CDK inhibitor and AK inhibitor drugs, we
believe that our drug candidates are differentiated in that they are orally available and have
unique target profiles or mechanisms of action. For example, we believe that our sapacitabine is
the only orally available nucleoside analogue presently being tested in Phase 2 trials in AML,
seliciclib is the only orally available CDK inhibitor currently in Phase 2 trials and CYC116 is the
only dual Aurora A and Aurora B kinase inhibitor in clinical trials that also interacts with VEGFR2
and has anti-angiogenic activity.
Our corporate headquarters is located in Berkeley Heights, New Jersey, with research facilities
located in the United Kingdom. From our inception in 1996 through September 30, 2008, we have
devoted substantially all our efforts and resources to our research and development activities. We
have incurred significant net losses since inception. As of September 30, 2008, our accumulated
deficit during the development stage was $194.8 million. We expect to continue incurring
substantial losses for the next several years as we continue to develop our clinical, pre-clinical
and other drugs currently in development and build our commercialization capability. Our operating
expenses are primarily comprised of research and development expenses and selling, general and
administrative costs.
On September 16, 2008, the Company announced a revision of its operating plan to
concentrate its resources on the advancement of its lead drug, sapacitabine, while maintaining the
Companys core competency in drug discovery and cell cycle biology. The plan reduced the workforce
across all locations by 25 people. For the three months ended September 30, 2008, the Company
recorded a restructuring charge of $0.5 million.
As of September 30, 2008, we have not generated significant product revenue but have financed our
operations and internal growth through private placements, licensing revenue, interest on
investments, government grants and research and development tax credits. Our revenue has consisted
of collaboration and grant revenue. Beginning in 2008, our revenue now includes product sales
following the ALIGN acquisition.
Acquisition of ALIGN Pharmaceuticals, LLC and ALIGN Holdings, LLC
On October 5, 2007, the Company purchased certain net assets of ALIGN Pharmaceuticals, LLC or
ALIGN. As part of the asset purchase, the Company acquired the sellers exclusive rights to sell
and distribute three products in the United States used primarily to manage the effects of
radiation or chemotherapy in cancer patients: Xclair® Cream, Numoisyn Liquid and Numoisyn
Lozenges. The acquired business provides Cyclacel with the foundation to build a commercial
organization focused on cancer that is complementary to Cyclacels oncology/hematology products in
development and is part of Cyclacels strategy to build a diversified biopharmaceutical business.
24
Under the terms of the asset purchase agreement, the Company (i) paid approximately $3.3 million in
cash to the sellers at closing, plus approximately $0.5 million to be used to pay certain creditors
of the sellers, and (ii) agreed to issue up to a maximum aggregate of 184,176 shares of the
Companys common stock, or
the Stock Consideration, as consideration for the asset purchase. 46,044 shares of the Stock
Consideration are issuable on the first anniversary of the closing date, and the balance is
issuable in two tranches upon achievement of certain operational and financial milestones (in all
cases, subject to satisfaction of any outstanding indemnification obligations of the sellers). The
Company has already determined that 46,044 shares of the Stock Consideration will not be issued due
to the sellers failure to achieve the first of the two milestones. The Company is reviewing
certain indemnity issues which may be satisfied pursuant to the terms
of the asset purchase agreement. The final 92,088 shares of the
Stock Consideration is issuable if the sellers meet certain financial milestones as of December 31,
2008. The Company is also committed, as part of securing long term supply arrangements, to make
future payments of approximately $0.6 million in 2009 and $0.7 million in 2010. The present value
of these commitments has been reported as other short term payables and other long term payables on
the condensed consolidated balance sheets As of September 30, 2008.
Results of Operations
The results of operations and balance sheet data for the three months ended September 30, 2008
reflect the operations of the Company and its subsidiary companies, including ALIGN. However, the
results of operations for the comparable periods in 2007 do not reflect the results of ALIGN and,
therefore, may not be comparable to the results of the current period.
Three Months Ended September 30, 2007 and 2008
Revenues
The following table summarizes the components of our revenues for the three months ended September
30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Product revenue |
|
|
|
|
|
|
257 |
|
|
|
257 |
|
|
|
100 |
|
Grant revenue |
|
|
33 |
|
|
|
12 |
|
|
|
(21 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
33 |
|
|
|
269 |
|
|
|
236 |
|
|
|
715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue is derived as a result of the asset acquisition of ALIGN on October 5, 2007. During
the three months ended September 30, 2008, we recorded sales of $0.3 million.
Grant revenue is recognized as we incur and pay for qualifying costs and services under the
applicable grant. Grant revenue is primarily derived from various United Kingdom government grant
awards.
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Cost of goods sold |
|
|
|
|
|
|
120 |
|
|
|
120 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales represented 47% of product revenue for the three months ended September 30,
2008.
During the three months ended September 30, 2008, we recorded cost of goods sold of $0.1 million
related to the sale of the ALIGN products.
25
Research and development expenses
To date, we have focused on drug discovery and development programs, with particular emphasis on
orally available anticancer agents. Research and development expense represents costs incurred to
discover and develop novel small molecule therapeutics, including clinical trial costs for
sapacitabine, seliciclib and
CYC116, to advance product candidates through clinical trials, to develop in-house research and
preclinical study capabilities and to advance our biomarker program and technology platforms. We
expense all research and development costs as they are incurred. Research and development expenses
primarily include:
|
|
|
payroll and related-expense, including consultants and contract research; |
|
|
|
|
clinical trial and regulator-related costs; |
|
|
|
|
pre-clinical studies; |
|
|
|
|
screening and identification of drug candidates; |
|
|
|
|
laboratory supplies and materials; |
|
|
|
|
technology license costs; |
|
|
|
|
rent and facility expenses for our laboratories; and |
|
|
|
|
scientific consulting fees. |
The following table provides information with respect to our research and development expenditure
for the three months ended September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Sapacitabine |
|
|
477 |
|
|
|
1,299 |
|
|
|
822 |
|
|
|
172 |
|
Seliciclib |
|
|
758 |
|
|
|
797 |
|
|
|
39 |
|
|
|
5 |
|
CYC116 |
|
|
672 |
|
|
|
183 |
|
|
|
(489 |
) |
|
|
(73 |
) |
Other research and development costs |
|
|
2,542 |
|
|
|
1,751 |
|
|
|
(791 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
|
4,449 |
|
|
|
4,030 |
|
|
|
(419 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses represented 64% and 28% of our operating expenses for the
three months ended September 30, 2007 and 2008, respectively.
Research and development expenditure decreased $0.4 million from $4.4 million for the three month
period ended September 30, 2007 to $4.0 million for the three month period ended September 30,
2008. Sapacitabine costs increased by $0.8 million primarily due to the commencement of a Phase 2
trial in elderly AML in December 2007 and costs related to pre-clinical and product scale-up costs.
This was further offset by a reduction of $0.5 million in the CYC116 program due to re-formulation
of the drug as well as a reduction in other programs in order to conserve cash.
The future
We plan to invest in our research and development programs to further enhance our clinical and
regulatory capabilities to allow us to advance the development of our drug candidates. In August
2008, we announced the results of the Phase 2 trial of seliciclib in the APPRAISE study. We do not
expect to incur additional expenses after the last enrolled patient completes follow-up according
to the study protocol other than the normal costs associated with preparing the final study
reports. In September 2008, we announced a revision of our operating plan and we plan to
concentrate on the advancement of our lead drug sapacitabine and in doing so reduce our research
and development costs and conserve our cash.
26
Selling, general and administrative expenses
Selling, general and administrative expenses include costs for sales and marketing and
administrative personnel, legal and other professional expenses and general corporate expenses. The
following table summarizes the selling, general and administrative expenses for the three months
ended September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Total selling, general and administrative expenses |
|
|
2,523 |
|
|
|
3,218 |
|
|
|
695 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administration expenses represented 36% and 23% of our operating
expenses for the three months ended September 30, 2007 and 2008, respectively.
Our selling, general and administrative expenditure increased by $0.7 million to $3.2 million for
the three months ended September 30, 2008 from $2.5 million for the three months ended September
30, 2007. The increase of $0.7 million in expenses was primarily attributable to $0.7 million of
ALIGN related costs maintaining our sales force and marketing efforts as well as a $0.2 million
charge on the amortization of intangibles.
The future
Following the acquisition of ALIGN, we expect to incur additional costs in support of developing
ALIGNs commercial operations. Additionally, we expect that our selling, general and administrative
expenses will continue to increase in subsequent periods due to supporting these sales and
marketing requirements and the added costs of ensuring the ALIGN business complies with the
requirements of the Sarbanes-Oxley Act of 2002.
Goodwill and intangible asset impairment
In
accordance with FAS 142, we recorded an impairment charge related to the goodwill acquired in the Xcyte
transaction of approximately $2.7 million during the three months ended September 30, 2008 as a
result of our market capitalization being lower than the book value of its constituent assets and
liabilities as a result of our reduced common stock price. In
accordance with FAS No. 144, we recorded an impairment charge related to the intangible assets ascribed in
the ALIGN transaction of approximately $3.6 million during the three months ended September 30,
2008 as a result of the sum of the undiscounted cash flows are less than the carrying amount of the
intangible assets on September 30, 2008.
Restructuring
expense
As of September 30, 2008, the restructuring liability associated with exiting the Bothell facility
was $2.3 million accounting for the estimated fair value of the remaining lease payments, net of
estimated sub-lease income. The restructuring liability is subject to a variety of assumptions and
estimates. We review these assumptions and estimates on a quarterly basis and will adjust the
accrual if necessary. There was no change in the estimate for the three months ended September 30,
2008.
For the three months ended September 30, 2007 and 2008, we recorded accretion expense associated
with the Bothell restructuring lease of $0.1 million on the consolidated statement of operations as
interest expense. A further $0.2 million of accretion expense will be recognized over the
remaining life of the lease to December 2010.
In September 2008, we announced a revision of our operating plan that concentrates our resources on
the advancement of our lead drug, sapacitabine, while maintaining our core competency in drug
discovery and cell cycle biology. The plan reduced the workforce across all locations by 25 people.
We recorded an estimated $0.4 million charge for severance payments and $0.1 million accelerated
deprecation charge for assets that will no longer be used during the three months ended September
30, 2008.
27
Other income (expense)
Other income (expense) is comprised of the change in valuation of the derivative, change in value
of liability classified warrants, foreign exchange gains and losses, interest income and interest
expense. The following table summarizes the other income (expense) for the three months ended
September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Change in valuation of derivative |
|
|
(19 |
) |
|
|
|
|
|
|
19 |
|
|
|
100 |
|
Change in valuation of warrants |
|
|
951 |
|
|
|
432 |
|
|
|
(519 |
) |
|
|
(55 |
) |
Foreign exchange gains/(losses) |
|
|
459 |
|
|
|
(4,776 |
) |
|
|
(5,235 |
) |
|
|
(1,141 |
) |
Interest income |
|
|
955 |
|
|
|
287 |
|
|
|
(668 |
) |
|
|
(70 |
) |
Interest expense |
|
|
(54 |
) |
|
|
(69 |
) |
|
|
(15 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
2,292 |
|
|
|
(4,126 |
) |
|
|
(6,418 |
) |
|
|
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 3, 2007, the embedded derivative associated with the dividend make-whole payment
expired reducing the liability to $0 and thus no further marked to market adjustments will be made
with regard to this embedded derivative. For the three months ended September 30, 2007, the
derivative valuation expense was $19,000.
The change in valuation of warrants relates to the issue of warrants to purchase shares of our
common stock under the registered direct financing completed in February 2007. The warrants issued
to the investors meet the requirements of and are being accounted for as a liability in accordance
with EITF 00-19. The value of the warrants is being marked to market each reporting period as a
derivative gain or loss until exercised or expiration. For the three months ended September 30,
2007 and 2008, we recognized the change in the value of warrants of approximately $1.0 million and
$0.4 million, respectively, as other income in the consolidated statement of operations.
For the three months ended September 30, 2008, we recorded a foreign exchange loss of $4.8 million
on our intercompany loans due to the strength of the US dollar against the British pound. This is
shown on the consolidated statement of operations as a separate line item called foreign exchange
gains/ (losses) within other income (expense) and re-classified from selling, general and
administrative as the underlying loan activity is of a financing nature rather than related to the
operating activities of the business and also owing to its magnitude. The comparative figures have
also been re-classified and for the three months to September 30, 2007 there was a foreign exchange
gain of $0.5 million.
Interest income decreased by $0.7 million from $1.0 million for three months ended September 30,
2007 to $0.3 million for the three months ended September 30, 2008. The decrease is primarily
attributable to lower average balances of cash and cash equivalents and short-term investments in
2008 as compared to 2007.
Interest expense increased by $15,000 to $0.1 million for the three months ended September 30, 2008
from $54,000 for the three months ended September 30, 2007. During the three months ended September
30, 2007 and 2008 interest expenses included accretion expenses associated with the Bothell lease
restructuring provision. During the three months ended September 30, 2008, there was also interest
associated with the deferred consideration and notes payable in relation to the acquisition of
ALIGN on October 5, 2007.
The future
The valuation of the liability-classified warrants will continue to be re-measured at the end of
each reporting period. The valuation of the warrants are dependent upon many factors including
estimated market volatility and stock price, and may fluctuate significantly and could have a
significant impact on our consolidated statement of operations. We will also continue to be subject
to foreign currency movements as a result of our research activities within the United Kingdom.
28
Income tax benefit
Credit is taken for research and development tax credits, which are claimed from the United
Kingdoms revenue and customs authority, or HMRC, in respect of qualifying research and development
costs incurred.
The following table summarizes research and development tax credits for the three months ended
September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Total income tax benefit |
|
|
433 |
|
|
|
411 |
|
|
|
(22 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development tax credits recoverable decreased by $22,000 from $0.43 million for three
months ended September 30, 2007 to $0.41 million for the three months ended September 30, 2008.
This decrease was a reflection of decreased income taxes available for recovery as a consequence of
lower eligible research and development payroll expenses in 2008.
The future
We expect to continue to be eligible to receive United Kingdom research and development tax credits
for the foreseeable future and will elect to do so.
Nine Months Ended September 30, 2007 and 2008
Revenues
The following table summarizes the components of our revenues for the nine months ended September
30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Collaboration and research and development revenue |
|
|
10 |
|
|
|
|
|
|
|
(10 |
) |
|
|
(100 |
) |
Product revenue |
|
|
|
|
|
|
590 |
|
|
|
590 |
|
|
|
100 |
|
Grant revenue |
|
|
107 |
|
|
|
36 |
|
|
|
(71 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
117 |
|
|
|
626 |
|
|
|
509 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration and research and development revenue was derived from several agreements under which
the Company provides compounds for evaluation for an agreed consideration.
Grant revenue is recognized as we incur and pay for qualifying costs and services under the
applicable grant. Grant revenue is primarily derived from various United Kingdom government grant
awards.
Product revenue is derived as a result of the asset acquisition of ALIGN on October 5, 2007. During
the nine months ended September 30, 2008, we recorded sales of $0.6 million.
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Cost of goods sold |
|
|
|
|
|
|
315 |
|
|
|
315 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales represented 53% of product revenue for the nine months ended September 30,
2008.
During the nine months ended September 30, 2008, we recorded cost of goods sold of $0.3 million
related to the sale of ALIGN products.
29
Research and development expenses
The following table provides information with respect to our research and development expenditure
for the nine months ended September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Sapacitabine |
|
|
1,862 |
|
|
|
4,940 |
|
|
|
3,078 |
|
|
|
165 |
|
Seliciclib |
|
|
2,405 |
|
|
|
2,408 |
|
|
|
3 |
|
|
|
|
|
CYC116 |
|
|
1,564 |
|
|
|
1,578 |
|
|
|
14 |
|
|
|
|
|
Other research and development costs |
|
|
6,911 |
|
|
|
6,792 |
|
|
|
(119 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
|
12,742 |
|
|
|
15,718 |
|
|
|
2,976 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses represented 61% and 46% of our operating expenses for the
nine months ended September 30, 2007 and 2008, respectively.
Research and development expenditures increased by $3.0 million to $15.7 million for the nine
months ended September 30, 2008 from $12.7 million for the nine months ended September 30, 2007.
The cost increase of $3.1 million, related to sapacitabine, is due to increased clinical trial
activity in particular the commencement of the Phase 2 trial in elderly AML in December 2007 as
well as additional pre-clinical and product scale-up.
Selling, general and administrative expenses
Selling, general and administrative expenses include costs for sales and marketing and
administrative personnel, legal and other professional expenses and general corporate expenses. The
following table summarizes the selling, general and administrative expenses for the nine months
ended September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Total selling, general and administrative expenses |
|
|
8,022 |
|
|
|
11,337 |
|
|
|
3,315 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administration expenses represented 38% and 33% of our operating
expenses for each of the nine months ended September 30, 2007 and 2008, respectively.
Our selling, general and administrative expenditure increased by $3.3 million to $11.3 million for
the nine months ended September 30, 2008 from $8.0 million for the nine months ended September 30,
2007. The increase of $3.3 million in expenses was primarily attributable to our ALIGN subsidiary
with $2.2 million related to the costs of our sales force and marketing efforts and $0.8 million in
intangible assets amortization charges. The remaining increase of $0.3 million relates to
increased professional fees and personnel related expenses.
Goodwill and intangible asset impairment
In
accordance with FAS 142, we recorded an impairment charge related to the goodwill acquired in the Xcyte
transaction of approximately $2.7 million during the three months ended September 30, 2008 as a
result of our market capitalization being lower than the book value of its constituent assets and
liabilities as a result of our reduced common stock price. In
accordance with FAS No. 144, we recorded an impairment charge related to the intangible assets ascribed in
the ALIGN transaction of approximately $3.6 million during the three months ended September 30,
2008 as a result of the sum of the undiscounted cash flows are less than the carrying amount of the
intangible assets on September 30, 2008.
30
Restructuring
expense
As of September 30, 2008, the restructuring liability associated with exiting the Bothell facility
was $2.3 million accounting for the estimated fair value of the remaining lease payments, net of
estimated sub-lease income. The restructuring liability is subject to a variety of assumptions and
estimates. We review these
assumptions and estimates on a quarterly basis and will adjust the accrual if necessary. There was
no change in the estimate for the nine months ended September 30, 2008.
For the nine months ended September 30, 2007 and 2008, we recorded accretion expense associated
with the Bothell restructuring lease of $0.2 million on the consolidated statement of operations as
interest expense. A further $0.2 million of accretion expense will be recognized over the
remaining life of the lease to December 2010.
In September 2008, we announced a revision of our operating plan that concentrates our resources on
the advancement of our lead drug, sapacitabine, while maintaining a core competency in drug
discovery and cell cycle biology. The plan reduced the workforce across all locations by 25 people.
We recognized $0.4 million expense for severance payments and $0.1 million of accelerated
depreciation for assets that will no longer be utilized for the three months September 30, 2008.
Other income (expense)
Other income (expense) is comprised of the change in valuation of the derivative, change in value
of liability classified warrants, foreign exchange gains and losses, interest income and interest
expense. The following table summarizes the other income (expense) for the nine months ended
September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Change in valuation of derivative |
|
|
(89 |
) |
|
|
|
|
|
|
89 |
|
|
|
100 |
|
Change in valuation of warrants |
|
|
2,815 |
|
|
|
3,321 |
|
|
|
506 |
|
|
|
18 |
|
Foreign exchange gain/(losses) |
|
|
1,139 |
|
|
|
(4,638 |
) |
|
|
(5,777 |
) |
|
|
(507 |
) |
Interest income |
|
|
2,769 |
|
|
|
1,184 |
|
|
|
(1,585 |
) |
|
|
(57 |
) |
Interest expense |
|
|
(154 |
) |
|
|
(244 |
) |
|
|
(90 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
6,480 |
|
|
|
(377 |
) |
|
|
(6,857 |
) |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 3, 2007, the embedded derivative associated with the dividend make-whole payment
expired reducing the liability to $0 and thus no further marked to market adjustments will be made
with regard to this embedded derivative. For the nine months ended September 30, 2007, the
derivative valuation credit was $0.1 million.
The change in valuation of warrants relates to the issue of warrants to purchase shares of our
common stock under the registered direct financing completed in February 2007. The warrants issued
to the investors meet the requirements of and are being accounted for as a liability in accordance
with EITF 00-19. The value of the warrants is being marked to market each reporting period as a
derivative gain or loss until exercised or expiration. For the nine months ended September 30, 2007
and 2008, we recognized the change in the value of warrants of approximately $2.8 million and $3.3
million, respectively, as other income in the consolidated statement of operations.
For the nine months ended September 30, 2008 there were unfavorable foreign exchange movements of
$4.6 million on intercompany loans due to the decrease in the strength of the British pound against
the US dollar. This is shown on the consolidated statement of operations as a separate line item
called foreign exchange gains/(losses) within other income (expense) and re-classified from
selling, general and administrative as the underlying loan activity is of a finance nature rather than
related to the operating activities of the business and also owing to its magnitude. The
comparative figures have also been re-classified and for the nine months to September 30, 2007
there was a foreign exchange gain of $1.1 million.
Interest income decreased by $1.6 million from $2.8 million for the nine months ended September 30,
2007 to $1.2 million for the nine months ended September 30, 2008. The decrease is primarily
attributable to
lower average balances of cash and cash equivalents and short-term investments in 2008 as compared
to 2007.
31
Interest expense increased by $0.1 million to $0.2 million for the nine months ended September 30,
2008 from $0.1 million for the nine months ended September 30, 2007. During the nine months ended
September 30, 2007 and 2008 interest expenses included accretion expenses associated with the
Bothell lease restructuring provision. During the nine months ended September 30, 2008, there was
also interest associated with the deferred consideration and notes payable in relation to the
acquisition of ALIGN on October 5, 2007.
Income tax benefit
Credit is taken for research and development tax credits, which are claimed from HMRC, in respect
of qualifying research and development costs incurred.
The following table summarizes research and development tax credits for the nine months ended
September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
Difference |
|
|
Difference |
|
|
|
($000s) |
|
|
% |
|
Total income tax benefit |
|
|
1,549 |
|
|
|
1,511 |
|
|
|
(38 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development tax credits recoverable decreased by $15,000. The decrease was a
reflection of decreased income taxes available for recovery as a consequence of the lower eligible
research and development payroll expenses in 2008.
Liquidity and Capital Resources
The following is a summary of our key liquidity measures at December 31, 2007 and September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
|
($000s) |
|
Cash and cash equivalents |
|
|
30,987 |
|
|
|
26,723 |
|
Short-term investments, available for sale |
|
|
27,766 |
|
|
|
6,998 |
|
Current assets |
|
|
63,777 |
|
|
|
37,309 |
|
Current liabilities |
|
|
14,712 |
|
|
|
9,875 |
|
Working capital |
|
|
49,065 |
|
|
|
27,434 |
|
At September 30, 2008, we had cash and cash equivalents and short-term investments of $33.7 million
as compared to $58.8 million at December 31, 2007. The lower balance at September 30, 2008 was
primarily due to the ongoing research and development of our product candidates. Since our
inception, we have not generated any significant revenue and have relied primarily on the proceeds
from sales of equity and preferred securities to finance our operations and internal growth.
Additional funding has come through interest on investments, licensing revenue, government grants
and research and development tax credits. We have incurred significant losses since our inception.
As of September 30, 2008, we had an accumulated deficit of $194.8 million. We believe that existing
funds together with cash generated from operations are sufficient to satisfy our planned working
capital, capital expenditures, debt service and other financial commitments for the next twelve
months but business and environmental risks could have a detrimental affect on our availability of
cash.
32
Cash provided by (used in) operating, investing and financing activities for the nine months ended
September 30, 2007 and 2008, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
|
($000s) |
|
Net cash used in operating activities |
|
|
(17,630 |
) |
|
|
(23,532 |
) |
Net cash (used in) provided by investing activities |
|
|
(28,229 |
) |
|
|
21,688 |
|
Net cash provided by (used in) financing activities |
|
|
32,512 |
|
|
|
(931 |
) |
In our Annual Report on Form 10-K for the year ended December 31, 2007 under the heading
Liquidity and Capital Resources, we outlined our contractual obligations and other commitments.
For the nine months ended September 30, 2008, there have been no material changes in our
contractual obligations and other commitments. As disclosed in our current report on Form 8-K filed
with the SEC on March 24, 2008, we entered into a three-year employment agreement with our Chief
Executive Officer and President; which contain severance and change-in-control provisions. As
disclosed in our current report on Form 8-K filed with the SEC on April 2, 2008, we entered into a
three-year employment agreement with our Executive Vice President, Finance and Chief Operating
Officer which contain severance and change-in-control provisions.
Operating Capital and Capital Expenditure Requirements
We expect to continue to incur substantial operating losses in the future. Although we expect to
receive a modest amount of product revenues from the ALIGN business acquired on October 5, 2007, we
will not receive any product revenue on our drug candidates currently in development until they
have been approved by the U.S. Food and Drug Administration (FDA) or similar regulatory
agencies in other countries and successfully commercialized.
We currently anticipate that our cash, cash equivalents and marketable securities will be
sufficient to fund our operations for at least the next twelve months. However, we will need to
raise substantial additional funds to continue our operations. We cannot be certain that any of our
research and development programs will be successful or that we will be able to raise sufficient
funds to complete the development and commercialize any of our product candidates currently in
development, should they succeed or if we can successfully increase product revenues in the ALIGN
business. Additionally, we plan to continue to evaluate in-licensing and acquisition opportunities
to gain access to new drugs or drug targets that would fit with our strategy. Any such transaction
would likely increase our funding needs in the future.
Our future funding requirements will depend on many factors, including but not limited to:
|
|
|
the rate of progress and cost of our clinical trials, preclinical studies and
other discovery and research and development activities; |
|
|
|
|
the costs associated with establishing manufacturing and commercialization
capabilities, including the cost of establishing and growing a sales force; |
|
|
|
|
the costs of acquiring or investing in businesses, product candidates and
technologies; |
|
|
|
|
the costs of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights; |
|
|
|
|
the costs and timing of seeking and obtaining FDA and other regulatory
approvals; |
|
|
|
|
the effect of competing technological and market developments; |
|
|
|
|
the economic and other terms and timing of any collaboration, licensing or
other arrangements into which we may enter; and |
|
|
|
|
the costs associated with establishing the ALIGN business and the level of
market penetration and market share that is established. |
33
Until we can generate a sufficient amount of product revenue to finance our cash requirements,
which we may never do, we expect to finance future cash needs primarily through public or private
equity offerings, debt financings or strategic collaborations. We do not know whether additional
funding will be available on acceptable terms, or at all. If we are not able to secure additional
funding when needed, we may have to delay, reduce the scope of or eliminate one or more of our
clinical trials or research and development programs or curtail commercialization activities. In
addition, we may have to partner one or more of our product candidate programs at an earlier stage
of development, which would lower the future economic value of those programs to us.
Operating activities
Net cash used in operating activities increased $5.9 million to $23.5 million for the nine months
ended September 30, 2008 from $17.6 million for the nine months ended September 30, 2007. The
increase of $5.9 million in cash used in operations was mainly due to our ongoing efforts in
research and development and to a lesser extent costs associated with ALIGN.
Net cash used in operating activities during the nine months ended September 30, 2008 of $23.5
million resulted from our net operating loss of $32.4 million, adjusted for material non-cash
activities comprising amortization of investment premiums (discounts), change in valuation of
liability-classified warrants, depreciation and amortization, goodwill and intangibles impairment,
unrealized foreign exchange losses, non-cash stock based compensation expense and provision for
restructuring costs, amounting to $6.6 million and net decrease in working capital of $1.3 million
due to a decrease in prepaid expenses and other current assets combined with a net increase in
accounts payable and other current liabilities.
Net cash used in operating activities during the nine months ended September 30, 2007 of $17.6
million resulted from our net operating loss of $12.7 million, adjusted for material non-cash
activities comprising depreciation and amortization, and non-cash stock based compensation expense
amounting to $2.2 million, and net increase in working capital of $2.7 million, primarily due to a
net increase in prepaid expenses and other current assets.
Investing activities
Net cash used in investing activities for the nine months ended September 30, 2007 amounted to
$28.2 million. During the nine months ended September 30, 2008, cash provided by investing
activities amounted to $21.7 million. For the nine months ended September 30, 2008, we redeemed
$22.9 million of short-term investments which was partially offset by purchases of short-term
investments of $0.9 million while in the comparable period last year $27.4 million of short term
investments were purchased
Capital spending is important to our research and development initiatives and to maintain our
operational capabilities. Capital expenditures for property, plant and equipment for the nine
months ended September 30, 2007 and 2008 totaled approximately $0.8 million and $0.4 million,
respectively, for normal replacements and improvements.
To reduce our risk profile, we have invested proceeds from maturing short-term investments in cash
or cash equivalents in order to make funds available for operational requirements.
Financing activities
Net cash provided by financing activities decreased by $33.4 million, from a source of $32.5
million for the nine months ended September 30, 2007 to a use of $0.9 million for the nine months
ended September 30, 2008.
For the nine months ended September 30, 2008, the net cash outflow by financing activities related
to the payment of our preferred stock dividend of $0.9 million. For the nine months ended September
30, 2007,
the net cash provided by financing activities related primarily to our registered direct financing
in February 2007, offset by the payment of our preferred stock dividends of $0.6 million and by
payment of capital lease obligations of $0.1 million.
34
In February 2007, we raised $36.0 million in gross proceeds, before deducting placement agent fees
and offering expenses of $2.6 million, in a registered direct offering through the sale of
shares of our common stock and warrants. We sold approximately 4.2 million units, each unit
consisting of one share of our common stock and a seven-year warrant to purchase 0.25 shares of our
common stock, at a purchase price of $8.47125 per unit. The purchase price for the shares and the
exercise price for the warrants was $8.44 per share, the closing bid price for our common stock on
February 12, 2007. Investors paid $0.125 per warrant. The Company issued 4,249,668 shares of common
stock and warrants to purchase 1,062,412 shares of common stock.
In December 2007, we entered into a Committed Equity Financing Facility or CEFF, with Kingsbridge
Capital Limited or Kingsbridge, in which Kingsbridge committed to purchase the lesser of 4,084,590
shares of common stock or $60 million of common stock from Cyclacel capital during the next three
years. Under the terms of the agreement, we will determine the exact timing and amount of any CEFF
financings, subject to certain conditions. All amounts drawn down under the CEFF will be
settled via the issuance of our common stock. We may access capital under the CEFF in tranches of
either (a) 2% of our market capitalization at the time of the draw down or (b) the lesser of (i) 3%
of our market capitalization at the time of the draw down and (ii) an alternative draw down amount
based on the product of (A) the average trading volume of the 30-day trading period preceding the
draw down excluding the five highest and five lowest trading days during such period, (B) the
volume-weighted average trading price or VWAP on the trading day prior to the notice of draw down,
(C) the number of days during the draw down period and (D) 85%, subject to certain conditions. Each
tranche will be issued and priced over an eight-day pricing period. Kingsbridge will purchase
shares of common stock pursuant to the CEFF at discounts ranging from 6% to 10% depending on the
average market price of the common stock during the eight-day pricing period, provided that the
minimum acceptable purchase price for any shares to be issued to Kingsbridge during the eight-day
period is determined by the higher of $2.50 or 90% of our common stock closing price the day before
the commencement of each draw down. As of September 30, 2008, our share price is below the floor
price of $2.50 per share and therefore we are unable to utilize the facility at this time.
In connection with the CEFF, we issued a warrant to Kingsbridge to purchase up to 175,000 shares of
common stock at an exercise price of $7.17 per share which represents a 30% premium over the
average of the closing bid prices of our common stock during the 5 trading days preceding the
signing of the agreement. The warrant will become exercisable six months from the date of the
agreement and will remain exercisable, subject to certain exceptions, for a period of five years
thereafter. As of September 30, 2008, the warrants issued to the investors are classified as equity
in accordance with EITF 00-19.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based on our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities and expenses and
related disclosure of contingent assets and liabilities. We review our estimates on an ongoing
basis. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ from these estimates
under different assumptions or conditions. We believe the judgments and estimates required by the
following accounting policies to be critical in the preparation of our consolidated financial
statements.
35
Revenue Recognition
Product sales
We have adopted the following revenue recognition policy related to the sales of Xclair® Cream,
Numoisyn Liquid and Numoisyn Lozenges. We recognize revenue from these product sales when
persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered;
the price is fixed and determinable; and collectability is reasonably assured.
We offer a general right of return on these product sales, and have considered the guidance in FAS
No. 48, Revenue Recognition When Right of Return Exists (FAS 48) and Staff Accounting Bulletin
No. 104 Revenue Recognition (SAB 104). Under these pronouncements, we account for all product
sales using the sell-through method. Under the sell-through method, revenue is not recognized
upon shipment of product to distributors. Instead, upon the shipment of product to distributors,
the Company records deferred revenue at gross invoice sales price and deferred cost of sales at the
cost at which those goods were held in inventory. The Company recognizes revenue when such
inventory is sold through to the end user based upon prescriptions filled. To estimate product sold
through to end users, the Company relies on third-party information, including information obtained
from certain distributors with respect to their inventory levels and sell-through to customers, and
third-party market research data.
Stock-based Compensation
On January 1, 2006, we adopted FAS 123R. Under FAS 123R, the fair value of stock options and other
equity-based compensation must be recognized as expense in the statements of operations over the
requisite service period of each award. The determination of grant-date fair value is estimated
using an option-pricing model, which includes variables such as the expected volatility of our
share price, the anticipated exercise behavior of our employees, interest rates, forfeiture rates
and dividend yields. These variables are projected based on our historical data, experience, and
other factors. Changes in any of these variables could result in material adjustments to the
expense recognized for share-based payments.
Warrants liability
EITF 00-19 requires freestanding contracts that are settled in our own stock, including common
stock warrants to be designated as an equity instrument, asset or liability. Under the provisions
of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value until
exercised or expired, with any changes in fair value recorded in the results of operations. A
contract designated as an equity instrument must be included within equity, and no subsequent fair
value adjustments are required. We review the classification of the contracts at each balance sheet
date. Pursuant to EITF 00-19, since we are unable to control all the events or actions necessary to
settle the warrants in registered shares the warrants have been recorded as a current liability at
fair value. The fair value of the outstanding warrants is evaluated at each reporting period with
any resulting change in the fair value being reflected in the consolidated statements of
operations. The change in fair value recognized in the financial statements during the three months
ended September 30, 2007 and 2008 was $1.0 million and $0.4 million, respectively, with regards to
the February 2007 financing. Fair value is estimated using an option-pricing model, which includes
variables such as the expected volatility of our share price, interest rates, and dividend yields.
These variables are projected based on our historical data, experience, and other factors. Changes
in any of these variables could result in material adjustments to the expense recognized for
changes in the valuation of the warrants liability.
Goodwill
Goodwill represents the difference between the purchase price and the fair value of net tangible
and identifiable intangible assets acquired in the business combination. We recorded goodwill in
March 2006 with respect to the merger with Xcyte and in October 2007 with respect to the
acquisition of ALIGN. Under FAS No. 142, Goodwill and Other Intangible Assets, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if there are indicators such assets may be impaired) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to be amortized over
their estimated useful lives.
The Company tested goodwill for impairment on September 30, 2008, with respect to Xcyte and ALIGN
at a component level as part of a single reportable segment. As a result of the recent decrease in
our stock price over the past quarter, our market capitalization being below our carrying book
value of goodwill, we recorded a charge of $2.7 million in relation to the Xcyte business.
36
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk related to fluctuations in interest rates and in foreign currency
exchange rates.
Interest Rate Risk
Our short-term investments as of September 30, 2008 consisted of $6.5 million in corporate bonds
and commercial paper and $0.5 million in federal agency and municipal obligations with contractual
maturities of one year or less. Due to the short-term nature of our investments, we believe that
our exposure to market interest rate fluctuations is minimal. The corporate bonds in which we
invest are rated A or better by both Moodys and Standard and Poors. Our cash and cash
equivalents are held primarily in highly liquid money market accounts. A hypothetical 10% change in
short-term interest rates from those in effect at September 30, 2008 would not have a significant
impact on our financial position or our expected results of operations. We do not currently hold
any derivative financial instruments with interest rate risk.
Foreign Currency Risk
We are exposed to foreign currency rate fluctuations related to the operation of our subsidiary in
the United Kingdom. At the end of each reporting period, income and expenses of the subsidiary are
remeasured into U.S. dollars using the average currency rate in effect for the period and assets
and liabilities are remeasured into U.S. dollars using either historical rates or the exchange rate
in effect at the end of the relevant period. We currently do not engage in foreign currency
hedging; however, we have entered into certain contracts denominated in foreign currencies and
therefore, we are subject to currency exchange risks. For the period ended September 30, 2008
differences on foreign currency translation of $3.9 million are shown as a component of other
comprehensive loss. In the nine months ended September 30, 2008 foreign currency losses of $4.8
million were charged to the consolidated condensed statement of operations.
Common Stock Price Risk
In February 2007, we issued common stock and warrants. Pursuant to EITF 00-19, we recorded the fair
value of the warrants as a current liability. The fair value of the outstanding warrants is
evaluated at each reporting period with any resulting change in the fair value being reflected in
the condensed consolidated statements of operations. The change in fair value recognized in the
financial statements during the three months ended September 30, 2007 and 2008 was $1.0 million and
$0.4 million, respectively. The change in fair value recognized in the financial statements during
the nine months ended September 30, 2007 and 2008 was $2.8 million and $3.3 million, respectively.
Fair value of the warrants will be affected by estimates of various factors that may affect the
respective instrument, including our stock price, the risk free rate of return and expected
volatility in the fair value of our stock price. As the fair value of these warrants may fluctuate
significantly from period to period, the resulting change in valuation may have a significant
impact on our results of operations.
In December 2007, we entered into a CEFF with Kingsbridge, in which Kingsbridge committed to
provide us up to $60 million of capital during the next three years. Under the terms of the
agreement, we will determine the exact timing and amount of any common stock issues, subject to
certain conditions.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Spiro Rombotis, our President and Chief Executive Officer, and Paul McBarron, our Executive Vice
President, Finance, and Chief Operating Officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)), have
concluded that as of June 30, 2008 our disclosure controls and procedures are effective.
37
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in SEC Rule 13a-15(e), that
are designed to ensure that information required to be disclosed in our Securities Exchange Act of
1934 reports is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Executive Vice
President, Finance, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognizes 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 is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Executive Vice
President, Finance, of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the foregoing, our Chief
Executive Officer and Executive Vice President, Finance, concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, there has not been any change in our internal
control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under
the Securities Exchange Act of 1934 that has materially affected or is reasonably likely to
materially affect, our internal control over financial reporting.
38
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 1A. Risk Factors
In analyzing our company, you should consider carefully the following risk factors, together with
all of the other information included in Part I, Item 1A. Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2007 and on our quarterly report on Form 10-Q for the
quarters ended March 31 and June 30, 2008. Factors that could cause or contribute to differences in
our actual results include those discussed in the following subsection, as well as those discussed
above in Managements Discussion and Analysis of Financial Condition and Results of Operations
and elsewhere throughout this Quarterly Report on Form 10-Q. Each of the following risk factors,
either alone or taken together, could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an investment in our common stock.
If we do not realize the expected benefits from the restructuring that we announced in September
2008, our operating results and financial conditions could be negatively impacted.
In September 2008, we announced a strategic restructuring designed to focus our resources on
our lead drug, sapacitabine, while maintaining the companys core competency in drug discovery and
cell cycle biology. We cannot guarantee that we will not have to undertake additional
restructuring activities, that any of our restructuring efforts will be successful, or that we will
be able to realize the cost savings and other anticipated benefits from our restructuring. If we
are unable to realize the expected operational efficiencies from our restructuring, our operating
results and financial condition could be adversely affected.
Budget constraints resulting from our restructuring plan may negatively impact our research and
development, forcing us to delay our efforts to develop certain product candidates in favor of
developing others, which may prevent us from commercializing all product candidates as quickly as
possible.
Research and development is an expensive process. As part of our restructuring plan, we have
decided to focus our clinical development priorities on sapacitabine, while still possibly
continuing to fund certain additional programs pending the availability of clinical data, at which
time we will determine the feasibility of pursuing the advanced development of seliciclib and
CYC116. Because we have had to prioritize our development candidates as a result of budget
constraints, we may not be able to fully realize the value of our product candidates in a timely
manner, if at all.
If regulatory agencies do not
accept our proposed registration pathways based on Phase 2 data, then we will
likely need to conduct large, controlled pivotal studies, which are
time-consuming and expensive.
Regulatory agencies
including but not limited to the U.S. Food and Drug Administration, or FDA,
have in certain instances accepted Phase 2 data from uncontrolled studies, as
sufficient for approval in indications where an unmet medical need exists or in
exceptional circumstances. If regulatory agencies including but not limited to
FDA, determine that the results of our Phase 2 studies are not sufficient for
approval of our investigational drugs, we will likely need to undertake large,
controlled pivotal studies, which are time-consuming and expensive. Because we
have limited resources, and research and development is an expensive process,
any such requirements may adversely impact our operating results and financial
condition and delay our ability to commercialize our drug candidates.
39
If the results of our studies do not meet the minimal level of statistical significance or
other requirements of the U.S. Food and Drug Administration, or the FDA, or other regulatory
agencies, we will likely need to undertake placebo-controlled Phase 3 studies, which are
time-consuming and
expensive. Because we have limited resources, and research and development is an expensive
process, any such requirements by the FDA may adversely impact our operating results and
financial condition and delay our ability to commercialize our lead drug candidate.
Even if we believe the data collected from clinical trials of our drug candidates are
promising with respect to safety and efficacy, such data may not be deemed sufficient by regulatory
authorities to warrant product approval. Clinical data can be interpreted in different ways.
Regulatory officials could interpret such data in different ways than we do which could delay,
limit or prevent regulatory approval. The FDA, other regulatory authorities or we may suspend or
terminate clinical trials at any time. Any failure or significant delay in completing clinical
trials for our drug candidates, or in receiving regulatory approval for the commercialization of
our drug candidates, may severely harm our business and reputation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submissions of Matters to a Vote of Security Holders.
None.
Item 5.
Other Information.
None.
Item 6.
Exhibits.
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31.1 |
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Certification of Principal Executive Officer Pursuant to Securities
Exchange Act Rule 13a-14(a) As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Principal Financial Officer Pursuant to Securities
Exchange Act Rule 13a-14(a) As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in
Berkeley Heights, New Jersey, on November 7, 2008.
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CYCLACEL PHARMACEUTICALS, INC. |
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Dated: November 7, 2008
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By:
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/s/ Paul McBarron
Paul McBarron
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Executive Vice President, Finance, and |
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Chief Operating Officer |
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(Authorized Officer and Principal Financial Officer) |
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41
EXHIBIT INDEX
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Exhibit No. |
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Description |
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31.1 |
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Certification of Principal Executive Officer Pursuant to
Securities Exchange Act Rule 13a-14(a) As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Principal Financial Officer Pursuant to
Securities Exchange Act Rule 13a-14(a) As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
42