Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

OR

 

o         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)

 

Delaware

 

91-1707622

(State or Other Jurisdiction
of Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

200 Connell Drive, Suite 1500

Berkeley Heights, New Jersey

 

07922

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s 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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting filer x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of November 13, 2013 there were 18,691,718 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

CYCLACEL PHARMACEUTICALS, INC.

 

INDEX

 

 

 

 

Page

Part I.

Financial Information

3

 

Item 1.

Financial Statements (Unaudited)

3

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

 

Item 4.

Controls and Procedures

41

Part II.

Other Information

 

 

Item 1.

Legal Proceedings

41

 

Item 1A.

Risk Factors

42

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

 

Item 3.

Defaults upon Senior Securities

60

 

Item 4.

Mine Safety Disclosures

61

 

Item 5.

Other Information

61

 

Item 6.

Exhibits

61

SIGNATURE PAGE

62

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CYCLACEL PHARMACEUTICALS, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

(In $000s, except share amounts)

 

 

 

December 31,

 

September 30,

 

 

 

2012

 

2013

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

16,412

 

$

34,487

 

Prepaid expenses and other current assets

 

1,599

 

2,440

 

Current assets of discontinued operations

 

861

 

792

 

Total current assets

 

18,872

 

37,719

 

Property, plant and equipment (net)

 

129

 

174

 

Long-term assets of discontinued operations

 

353

 

96

 

Total assets

 

$

19,354

 

$

37,989

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,259

 

$

2,352

 

Accrued and other current liabilities

 

5,601

 

6,284

 

Economic Rights measured at fair value

 

1,120

 

 

Other liabilities measured at fair value

 

20

 

20

 

Current liabilities of discontinued operations

 

335

 

322

 

Total current liabilities

 

9,335

 

8,978

 

Total liabilities

 

9,335

 

8,978

 

Commitments and contingencies (Note 7)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized at December 31, 2012 and September 30, 2013; 1,213,142 and 335,273 shares issued and outstanding at December 31, 2012 and September 30, 2013, respectively. Aggregate preference in liquidation of $14,436,390 and $3,989,749 at December 31, 2012 and September 30, 2013, respectively

 

1

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized at December 31, 2012 and September 30, 2013; 8,686,484 and 18,691,718 shares issued and outstanding at December 31, 2012 and September 30, 2013, respectively

 

9

 

18

 

Additional paid-in capital

 

280,211

 

315,036

 

Accumulated other comprehensive income (loss)

 

48

 

(172

)

Deficit accumulated during the development stage

 

(270,250

)

(285,871

)

Total stockholders’ equity

 

10,019

 

29,011

 

Total liabilities and stockholders’ equity

 

$

19,354

 

$

37,989

 

 

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

 

3



Table of Contents

 

CYCLACEL PHARMACEUTICALS, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In $000s, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Period from
August 13,
1996
(inception) to
September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Collaboration and research and development revenue

 

$

 

$

 

$

 

$

 

$

3,100

 

Grant revenue

 

38

 

309

 

64

 

785

 

4,502

 

Total revenues

 

38

 

309

 

64

 

785

 

7,602

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,532

 

4,575

 

4,596

 

8,786

 

201,177

 

General and administrative

 

2,028

 

1,529

 

5,917

 

5,999

 

95,410

 

Goodwill and intangibles impairment

 

 

 

 

 

2,747

 

Other restructuring costs

 

 

 

 

 

2,634

 

Total operating expenses

 

3,560

 

6,104

 

10,513

 

14,785

 

301,968

 

Operating loss

 

(3,522

)

(5,795

)

(10,449

)

(14,000

)

(294,366

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Costs associated with aborted 2004 IPO

 

 

 

 

 

(3,550

)

Payment under guarantee

 

 

 

 

 

(1,652

)

Non-cash consideration associated with stock purchase agreement

 

 

 

 

 

(423

)

Change in valuation of Economic Rights

 

(63

)

 

27

 

570

 

547

 

Change in valuation of liabilities measured at fair value

 

1

 

 

51

 

 

6,378

 

Foreign exchange gain (loss)

 

6

 

25

 

237

 

44

 

(3,961

)

Interest income

 

5

 

8

 

17

 

12

 

13,759

 

Interest expense

 

 

 

 

 

(4,567

)

Other income (expense), net

 

1

 

16

 

77

 

5,520

 

5,597

 

Total other (expense) income

 

(50

)

49

 

409

 

6,146

 

12,128

 

Loss from continuing operations before taxes

 

(3,572

)

(5,746

)

(10,040

)

(7,854

)

(282,238

)

Income tax benefit

 

419

 

730

 

714

 

1,218

 

21,013

 

Net loss from continuing operations

 

(3,153

)

(5,016

)

(9,326

)

(6,636

)

(261,225

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

1,263

 

20

 

904

 

70

 

(11,739

)

Income tax on discontinued operations

 

 

(8

)

 

(28

)

(365

)

Net income (loss) from discontinued operations

 

1,263

 

12

 

904

 

42

 

(12,104

)

Net loss

 

(1,890

)

(5,004

)

(8,422

)

(6,594

)

(273,329

)

Dividend on preferred ordinary shares

 

 

 

 

 

(38,123

)

Deemed dividend on convertible exchangeable preferred shares

 

 

(661

)

 

(9,027

)

(12,542

)

Dividend on convertible exchangeable preferred shares

 

(182

)

(63

)

(546

)

(248

)

(4,633

)

Net loss applicable to common shareholders

 

$

(2,072

)

$

(5,728

)

$

(8,968

)

$

(15,869

)

(328,627

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, continuing operations — Basic and diluted

 

$

(0.40

)

$

(0.32

)

$

(1.20

)

$

(1.15

)

 

 

Net income per share, discontinued operations — Basic and diluted

 

$

0.15

 

$

0.00

 

$

0.11

 

$

0.00

 

 

 

Net loss applicable to common shareholders - Basic and diluted

 

$

(0.25

)

$

(0.32

)

$

(1.09

)

$

(1.15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

8,429,269

 

17,788,568

 

8,227,721

 

13,850,792

 

 

 

 

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

 

4



Table of Contents

 

CYCLACEL PHARMACEUTICALS, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In $000s, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Period from
August 13,
1996
(inception) to
September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

2013

 

Net loss from continuing operations

 

$

(3,153

)

$

(5,016

)

$

(9,326

)

$

(6,636

)

$

(261,225

)

Net income (loss) from discontinued operations

 

1,263

 

12

 

904

 

42

 

(12,104

)

Net loss

 

(1,890

)

(5,004

)

(8,422

)

(6,594

)

(273,329

)

Translation adjustment

 

(3,611

)

(6,985

)

(4,542

)

(347

)

368

 

Unrealized foreign exchange gain (loss) on intercompany loans

 

3,584

 

6,818

 

4,536

 

127

 

(540

)

Comprehensive loss

 

$

(1,917

)

$

(5,171

)

$

(8,428

)

$

(6,814

)

$

(273,501

)

 

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

 

5



Table of Contents

 

CYCLACEL PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In $000s)
(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

Period from
August 13, 1996
(inception)
to
September 30,

 

 

 

2012

 

2013

 

2013

 

Operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(8,422

)

$

(6,594

)

$

(273,329

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Accretion of interest on notes payable, net of amortization of debt premium

 

 

 

100

 

Amortization of investment premiums, net

 

 

 

(2,297

)

Change in valuation of liabilities measured at fair value

 

(78

)

(1,120

)

(7,475

)

Non-cash consideration associated with stock purchase agreement

 

 

 

423

 

Depreciation

 

45

 

58

 

12,673

 

Amortization of intangible assets

 

 

 

886

 

Fixed asset impairment

 

 

 

221

 

Unrealized foreign exchange (gains) losses

 

 

 

7,747

 

Deferred revenue

 

 

 

(98

)

Compensation for warrants issued to non-employees

 

 

 

1,215

 

Gain on sale of patents

 

 

(5,500

)

(5,500

)

Shares issued for IP rights

 

 

 

446

 

Loss (gain) on disposal of property, plant and equipment

 

(62

)

 

38

 

Goodwill and intangibles impairment

 

 

 

7,934

 

Stock-based compensation

 

287

 

244

 

19,647

 

Provision for restructuring

 

 

 

1,779

 

Amortization of issuance costs of Preferred Ordinary ‘C’ shares

 

 

 

2,517

 

Transaction costs on sale of Economic Rights

 

33

 

 

33

 

Gain on termination of distribution agreements

 

(1,192

)

 

(1,192

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

25

 

(746

)

(1,043

)

Accounts payable and other current liabilities

 

(220

)

837

 

(2,708

)

Net cash used in operating activities

 

(9,584

)

(12,821

)

(237,983

)

Investing activities:

 

 

 

 

 

 

 

Purchase of ALIGN

 

 

 

(3,763

)

Purchase of property, plant and equipment

 

(12

)

(99

)

(8,948

)

Minimum royalty payments received from termination of ALIGN license agreement

 

 

264

 

264

 

Proceeds from sale of patents

 

 

5,500

 

5,500

 

Proceeds from sale of property, plant and equipment

 

62

 

 

225

 

Purchase of short-term investments on deposit, net of maturities

 

 

 

(156,657

)

Cash proceeds from redemption of short term securities

 

 

 

162,729

 

Net cash provided by (used in) investing activities

 

50

 

5,665

 

(650

)

 

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Table of Contents

 

CYCLACEL PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In $000s)
(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

Period from
August 13, 1996
(inception)
to
September 30,

 

 

 

2012

 

2013

 

2013

 

Financing activities:

 

 

 

 

 

 

 

Payments of capital lease obligations

 

 

 

(3,719

)

Proceeds from issuance of ordinary and preferred ordinary shares, net of issuance costs

 

 

 

121,678

 

Proceeds from issuance of common stock and warrants, net of issuance costs

 

2,886

 

25,636

 

121,188

 

Proceeds from the exercise of stock options and warrants, net of issuance costs

 

48

 

 

267

 

Payment of preferred stock dividend

 

 

(255

)

(2,153

)

Repayment of government loan

 

 

 

(455

)

Government loan received

 

 

 

414

 

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 of Xcyte

 

 

 

17,915

 

Costs associated with stock purchase

 

 

 

(1,951

)

Net cash provided by financing activities

 

2,934

 

25,381

 

272,815

 

Effect of exchange rate changes on cash and cash equivalents

 

(12

)

(150

)

305

 

Net increase (decrease) in cash and cash equivalents

 

(6,612

)

18,075

 

34,487

 

Cash and cash equivalents, beginning of period

 

24,449

 

16,412

 

 

Cash and cash equivalents, end of period

 

$

17,837

 

$

34,487

 

$

34,487

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash received during the period for:

 

 

 

 

 

 

 

Interest

 

10

 

9

 

11,765

 

Taxes

 

556

 

970

 

19,742

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

 

 

(1,914

)

Schedule of non-cash transactions:

 

 

 

 

 

 

 

Acquisitions of equipment purchased through capital leases

 

 

 

3,470

 

Issuance of shares of common stock 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

 

 

181

 

345

 

Issuance of other long term payable on ALIGN acquisition

 

 

 

1,122

 

 

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

 

7



Table of Contents

 

CYCLACEL PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.    NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Nature of Operations

 

Cyclacel Pharmaceuticals, Inc. (Cyclacel or the Company) is a development-stage biopharmaceutical company dedicated to the development and commercialization of novel, mechanism-targeted drugs to treat human cancers and other serious diseases. Cyclacel is focused on delivering leading edge therapeutic management of cancer patients based on a clinical development pipeline of novel drug candidates.

 

Cyclacel’s clinical development priorities are focused on sapacitabine, an orally available, cell cycle modulating nucleoside analogue.

 

Sapacitabine is being evaluated in the SEAMLESS Phase 3 trial being conducted under a Special Protocol Assessment (“SPA”) agreement with the US Food and Drug Administration (“FDA”) for the front-line treatment of acute myeloid leukemia (“AML”) in the elderly and in Phase 2 studies for AML, myelodysplastic syndromes (“MDS”), non-small cell lung cancer (“NSCLC”) and chronic lymphocytic leukemia. Sapacitabine is also being evaluated in a Phase 1 study in combination with seliciclib, our second clinical candidate, in patients with solid tumors. The FDA and the European Medicines Agency, or EMA, have designated sapacitabine as an orphan drug for the treatment of both AML and MDS.

 

The Company has evaluated seliciclib, an oral, highly selective inhibitor of CDK enzymes, in NSCLC and nasopharyngeal cancer (“NPC”). Seliciclib is also to be evaluated in an investigator-initiated Phase 2 study for treatment of rheumatoid arthritis supported by a £1 million (approximately $1.5 million) grant awarded by the United Kingdom’s Medical Research Council.

 

Our second generation CDK inhibitor, CYC065, is an oral, highly selective inhibitor of CDK enzymes. CYC065 has been shown to have increased anti-proliferative potency and improved pharmaceutical properties compared to seliciclib. Investigational new drug or IND-enabling studies with CYC065 are in progress supported by a £1.2 million (approximately $1.9 million) grant from the UK Government’s Biomedical Catalyst.

 

In addition to these development programs, the Company has allocated limited resources to other programs allowing the Company to maintain and build on its core competency in cell cycle biology and related drug discovery. These include CYC140, an internally-discovered, potent and selective, orally-available, small molecule inhibitor of PLK1, or polo-like kinase 1. PLKs are kinases active during cell division that target the mitotic phase of the cancer cell cycle. In the Company’s Aurora kinase inhibitor program, CYC116, an internally-discovered, orally-available, small molecule inhibitor of Aurora kinases A and B and Vascular Endothelial Growth Factor Receptor 2, or VEGFR2, has completed a multicenter Phase 1 trial. PLK and Aurora are cancer drug targets discovered by Professor David Glover, the Company’s Chief Scientist.

 

As a development stage enterprise, substantially all efforts of the Company to date have been devoted to performing research and development, conducting clinical trials, developing and acquiring intellectual property, raising capital and recruiting and training personnel.

 

Capital Resources

 

The Company’s existing capital resources are expected to be sufficient beyond the completion of the SEAMLESS Phase 3 trial but not sufficient to complete development of other indications or product candidates or to commercialize any of the Company’s product candidates.

 

Basis of Presentation

 

The condensed consolidated balance sheet as of September 30, 2013, the condensed consolidated statements of operations, comprehensive loss, and cash flows for the three and nine months ended September 30, 2012 and 2013 and the period from August 13, 1996 (inception) to September 30, 2013, and all related disclosures contained in the accompanying notes are unaudited. The condensed consolidated balance sheet as of December 31, 2012 is derived from the audited consolidated financial statements included in the 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements are presented on the basis of accounting principles that are generally accepted in the United States (“GAAP”) 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, 2013, and the results of operations, comprehensive loss and cash flows for the three and nine months ended September 30, 2012 and 2013, have been made. The interim results for the three months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 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, 2012, included in the Company’s Annual Report on Form 10-K filed with the SEC.

 

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Table of Contents

 

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 GAAP 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. Critical estimates include inputs used to determine stock-based compensation expense and the fair value of financial instruments and other liabilities measured at fair value. Cyclacel reviews its estimates on an ongoing basis. The estimates are 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 significant in the preparation of the Company’s consolidated financial statements.

 

Cash and Cash Equivalents

 

Cash equivalents are stated at cost, which is substantially the same as fair value. The Company considers all highly liquid investments with an original maturity of three months or less at the time of initial purchase to be cash equivalents and categorizes such investments as held to maturity. The objectives of the Company’s cash management policy are to safeguard and preserve funds, to maintain liquidity sufficient to meet Cyclacel’s cash flow requirements and to attain a market rate of return. Cash and cash equivalents, comprised of $4.2 million of cash and $30.3 million of cash equivalents, was $34.5 million at September 30, 2013. Cash and cash equivalents, comprised of $12.3 million of cash and $4.1 million of cash equivalents, was $16.4 million at December 31, 2012. Cash equivalents include money market funds and commercial paper.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentration of credit risk are primarily cash and cash equivalents. The Company maintains its cash and cash equivalent balances in the form of business checking accounts, money market accounts and commercial paper, the balances of which at times may exceed federal insurance limits. Cash equivalents are invested in accordance with the Company’s investment policy. The investment policy includes guidelines on the quality of the institutions and financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk.

 

Fair Value of Financial Instruments

 

Financial instruments consist of cash and cash equivalents, accounts payable, accrued liabilities, common stock warrants, financial instruments associated with stock purchase agreements, and other arrangements. The carrying amounts of cash and cash equivalents, accounts payable, and accrued liabilities approximate their respective fair values due to the nature of the accounts, notably their short maturities. Warrants, financial instruments associated with stock purchase agreements, and certain other liabilities are measured at fair value using applicable inputs as described in Note 3 - Fair Value.

 

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Table of Contents

 

Revenue Recognition

 

Collaboration, research and development, and grant revenue

 

Certain of the Company’s 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 or determinable; and collectability is reasonably assured. Determination of whether these criteria have been met is based on management’s 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 Trial Accounting

 

Data management and monitoring of the Company’s clinical trials are performed with the assistance of contract research organizations (‘‘CROs’’) or clinical research associates (‘‘CRAs’’) in accordance with the Company’s 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 costs related to patient enrollment are accrued as patients are entered into and progress through the trial. 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.

 

Research and Development Expenditures

 

Research and development expenses consist primarily of costs associated with the Company’s product candidates, upfront fees, milestones, compensation and other expenses for research and development personnel, supplies and development materials, costs for consultants and related contract research, facility costs and depreciation. Expenditures relating to research and development are expensed as incurred.

 

Foreign currency and currency translation

 

Transactions that are denominated in a foreign currency are remeasured into the functional currency at the current exchange rate on the date of the transaction. Any foreign currency-denominated monetary assets and liabilities are subsequently remeasured at current exchange rates, with gains or losses recognized as foreign exchange (losses)/gains in the statement of operations.

 

The assets and liabilities of the Company’s international subsidiary are translated from its functional currency into United States dollars at exchange rates prevailing at the balance sheet date. Average rates of exchange during the period are used to translate the statement of operations, while historical rates of exchange are used to translate any equity transactions. Translation adjustments arising on consolidation due to differences between average rates and balance sheet rates, as well as unrealized foreign exchange gains or losses arising from translation of intercompany loans that are of a long-term-investment nature, are recorded in other comprehensive income.

 

Fair Value Measurements

 

Inputs used to determine the fair value of financial and non-financial assets and liabilities are categorized using a fair value hierarchy that prioritizes observable and unobservable inputs into three broad levels, from Level 1, for quoted prices (unadjusted) in active markets for identical assets or liabilities, to Level 3, for unobservable inputs (see Note 3 - Fair Value).  Management reviews the categorization of fair value inputs on a periodic basis and may determine that it is necessary to transfer an input from one level of the fair value hierarchy to another based on changes in events or circumstances, such as a change in the observability of an input. Any such transfer will be recognized at the end of the reporting period.

 

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Income Taxes

 

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 the accounting guidance codified in ASC 740 “Income taxes” (“ASC 740”) related to accounting for uncertainty in income taxes. ASC 740 specifies the accounting for uncertainty in income taxes recognized in a company’s financial statements by prescribing a minimum probability threshold a tax position is required to meet before being recognized in the financial statements.

 

Credit is taken for research and development tax credits, which will be claimed from H. M. Revenue & Customs (“HMRC”) the United Kingdom’s taxation and customs authority, in the accounting period during which qualifying research and development costs are incurred.

 

Tax years 2010, 2011 and 2012 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States and the United Kingdom, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service (“IRS”), the HMRC or state tax authorities if they have or will be used in a future period. The Company is currently not under examination by the IRS or any other jurisdictions for any tax years.

 

Income tax benefit, net from continuing operations on the consolidated statements of operations of $1.2 million for the nine months ended September 30, 2013 includes $1.2 million of research and development tax credits from the HMRC.

 

Stock-based Compensation

 

The Company grants stock options, restricted stock units and restricted stock to officers, employees and directors under the Amended and Restated Equity Incentive Plan (“2006 Plan”), which was approved on March 16, 2006, as amended on May 21, 2007, amended and restated on April 14, 2008 and further amended on May 23, 2012. Under the 2006 Plan, the Company has granted various types of awards, which are described more fully in Note 6 - Stock Based Compensation Arrangements. The Company accounts for these awards under ASC 718 “Compensation — Stock Compensation” (“ASC 718”).

 

ASC 718 requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the requisite service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. The determination of grant-date fair value for stock option awards is estimated using the Black-Scholes model, which includes variables such as the expected volatility of the Company’s share price, the anticipated exercise behavior of employees, interest rates, and dividend yields. These variables are projected based on 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. Such value is recognized as an expense over the requisite service period, net of estimated forfeitures, using the straight-line attribution method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including type of awards granted, employee class, and historical experience. Actual results and future estimates may differ substantially from current estimates.

 

Segments

 

After considering its business activities and geographic reach, the Company has concluded that it operates in just one operating segment being the discovery, development and commercialization of novel, mechanism-targeted drugs to treat cancer and other serious disorders, with development operations in two geographic areas, namely the United States and the United Kingdom.

 

Net Income Per Common Share

 

The Company calculates net loss per common share in accordance with ASC 260 “Earnings Per Share” (“ASC 260”). Basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company’s potentially dilutive shares, which include outstanding common stock options, restricted stock, restricted stock units, convertible preferred stock, and common stock warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.

 

 

 

September 30,
2012

 

September 30,
2013

 

Stock options

 

480,415

 

487,719

 

Restricted stock units

 

40,121

 

119,248

 

Convertible preferred stock

 

73,747

 

20,381

 

Contingently issuable common stock and common stock warrants associated with Economic Rights

 

435,187

 

 

Common stock warrants

 

1,973,431

 

1,591,795

 

Total shares excluded from calculation

 

3,002,901

 

2,219,143

 

 

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Comprehensive Income (Loss)

 

In accordance with ASC 220, “Comprehensive Income” (“ASC 220”), 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, are reported, net of any related tax effect, to arrive at comprehensive income (loss). No taxes were recorded on items of other comprehensive income.

 

Accounting Standards Adopted in the Period

 

On January 1, 2013 the Company adopted guidance issued by the Financial Accounting Standards Board (“FASB”) on testing indefinite-lived intangible assets for impairment. This guidance states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying. Under the guidance, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The adoption of this guidance has not had a material impact on our consolidated financial statements.

 

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On January 1, 2013, the Company adopted guidance issued by the FASB on the reporting of amounts reclassified out of accumulated other comprehensive income. The guidance requires entities to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other reclassification items (that are not required under GAAP) to be reclassified directly to net income in their entirety in the same reporting period, an entity should cross-reference to other disclosures currently required under GAAP. The adoption of this guidance has not had a material impact on our consolidated financial statements.

 

On January 1, 2013, the Company adopted guidance issued by the FASB to clarify the scope of the previously issued guidance which required companies to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position. This guidance clarifies that ordinary trade receivables and receivables are not within the scope of the guidance and that the guidance only applies to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria or subject to a master netting arrangement or similar agreement. The adoption of this guidance has not had a material impact on our consolidated financial statements.

 

Recent Accounting Pronouncements Not Yet Effective

 

In July 2013, the FASB issued guidance relating to the presentation of an unrecognized tax benefit when a net operating loss carryforward (“NOL”), a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a NOL, a similar tax loss, or a tax credit carryforward, except to the extent it is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently reviewing the impact of adopting this guidance.

 

In March 2013, the FASB issued guidance relating to certain foreign currency matters. This guidance clarifies the parent company’s accounting for the cumulative translation adjustment when a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity or of an investment in a foreign entity. The guidance is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

In February 2013, the FASB issued guidance relating to obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The guidance should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements that exist at the beginning of an entity’s fiscal year of adoption. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

3.    FAIR VALUE

 

Fair Value Measurements

 

As defined in ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), 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, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

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·                  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.

 

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 considering counterparty credit risk in its measurement of fair value.

 

The fair value of the Company’s financial assets and liabilities that are measured on a recurring basis were determined using the following inputs as of December 31, 2012 (in $000s):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

5,523

 

$

6,799

 

$

 

$

12,322

 

Total assets

 

$

5,523

 

$

6,799

 

$

 

$

12,322

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Financial instrument associated with stock purchase agreement

 

$

 

$

 

$

 

$

 

Economic rights

 

 

 

1,120

 

1,120

 

Other liabilities measured at fair value:

 

 

 

 

 

 

 

 

 

Warrants liability

 

 

 

 

 

Scottish Enterprise agreement

 

 

 

20

 

20

 

Other liabilities measured at fair value

 

 

 

20

 

20

 

Total liabilities

 

$

 

$

 

$

1,140

 

$

1,140

 

 

The fair value of the Company’s financial assets and liabilities that are measured on a recurring basis were determined using the following inputs as of September 30, 2013 (in $000s):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

30,289

 

$

 

$

 

$

30,289

 

Total assets

 

$

30,289

 

$

 

$

 

$

30,289

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Financial instrument associated with stock purchase agreement

 

$

 

$

 

$

 

$

 

Other liabilities measured at fair value:

 

 

 

 

 

 

 

 

 

Warrants liability

 

 

 

 

 

Scottish Enterprise agreement

 

 

 

20

 

20

 

Other liabilities measured at fair value

 

 

 

20

 

20

 

Total liabilities

 

$

 

$

 

$

20

 

$

20

 

 

The following table reconciles the beginning and ending balances of Level 3 inputs for the nine months ended September 30, 2013 (in $000s):

 

 

 

Level 3

 

Balance as of December 31, 2012

 

$

1,140

 

Change in valuation of Economic Rights

 

(570

)

Movement of valuation of Economic Rights from Level 3 to Level 2

 

(550

)

Balance as of September 30, 2013

 

$

20

 

 

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Financial Instrument Associated with Stock Purchase Agreement

 

On December 14, 2012, the Company entered into a common stock purchase agreement with Aspire under which Aspire purchased 158,982 shares of common stock for an aggregate purchase price of $1.0 million and committed to purchase up to an additional 1,455,787 shares from time to time as directed by the Company over the next two years at prices derived from the market prices on or near the date of each sale. However, such commitment is limited to an additional $19.0 million of share purchases. In consideration for entering into the purchase agreement, concurrent with the execution of the purchase agreement, the Company issued 74,548 shares of its common stock to Aspire in lieu of paying a commitment fee. The fair value of the 74,548 shares of common stock along with the direct costs incurred in the connection with the Aspire transaction have been allocated to the shares sold at inception of this agreement and the right to sell additional shares in the future based on the ratio of shares sold at inception to the total shares subject to this agreement. As a result, the Company recorded an expense of $0.4 million on its consolidated statements of operations for the year ended December 31, 2012.

 

The Company has accounted for the right to sell additional shares based on the guidance of ASC 815, Derivative Financial Instruments (“ASC 815”), which requires the instrument to be measured at fair value with changes in fair value reported in earnings. The instrument had minimal fair value at inception and throughout the term of the agreement, as shares sold upon exercise are priced at an amount slightly lower than the fair value at the time of sale.

 

During the nine months ended September 30, 2013, the Company sold all of the 1,455,787 additional shares of its common stock allowed under the Common Stock Purchase Agreement to Aspire in consideration for aggregate proceeds of $6.6 million. The agreement was terminated on November 14, 2013 and no rights or obligations remain under the agreement.

 

Economic Rights

 

On March 22, 2012, the Company entered into a financing agreement with certain existing institutional stockholders. Under the terms of the agreement, investors received contractual rights to receive cash equal to 10% of any future litigation settlement related to specified intellectual property, subject to a cap. In certain defined situations, the Company may have to issue either additional shares of common stock or warrants (collectively, the “Economic Rights”). The Economic Rights were accounted for as a derivative financial instrument under ASC 815 and are measured at fair value. Changes in fair value are recognized in earnings.

 

On April 3, 2013, the Company entered into a definitive agreement with Celgene Corporation (“Celgene”) to sell to Celgene four Cyclacel-owned patents related to the use of romidepsin injection, intellectual property to which the Economic Rights relates. In connection with the agreement, Celgene has made to Cyclacel a one-time payment of $5.5 million and the litigation was dismissed. As a result, the holders of the Economic Rights were paid approximately $0.6 million in April 2013 in full satisfaction of the Company’s obligation under Economic Rights. The fair value of this liability was approximately $1.1 million as of December 31, 2012. The $0.6 million decrease in the fair value of the Economic Rights during the nine months ended September 30, 2013 was recognized as a gain in the consolidated statements of operations.

 

Up to December 31, 2012, the fair value of the Economic Rights was estimated using a decision-tree analysis method. This was an income-based method that incorporates the expected benefits, costs and probabilities of contingent outcomes under varying scenarios. Each scenario within the decision-tree was discounted to the present value using the Company’s credit adjusted risk-free rate and ascribed a weighted probability to determining the fair value. As of March 31, 2013, the Company had sufficient information available to estimate the fair value of the economic rights based on the actual amount paid under the Economic Rights agreement, which was 10% of the $5.5 million one-time payment from Celgene. The Company’s obligation under the Economic Rights was satisfied in April 2013.

 

Other Liabilities Measured at Fair Value

 

Warrants Liability

 

The Company issued warrants to purchase shares of common stock under the registered direct financing completed in February 2007. These warrants are being accounted for as a liability in accordance with ASC 815. 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 — 4.68%, expected volatility — 85%, expected dividend yield — 0%, and a remaining contractual life of 7 years. As of December 31, 2012 and September 30, 2013, the fair value of the warrants was approximately zero based on the high exercise price of the warrants relative to the Company’s stock price at December 31, 2012 and September 30, 2013, respectively, and the remaining term of less than 1 year. The fair value of the warrant is remeasured each reporting period, with a gain or loss recognized in the consolidated statement of operations. Such gains or losses will continue to be reported until the warrants are exercised or expired.

 

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The Company recognized the change in the value of warrants as a gain on the consolidated statement of operations of approximately $1,000 and $51,000 for the three and nine months ended September 30, 2012, respectively. There was no change in the value of warrants for the three and nine months ended September 30, 2013.

 

Scottish Enterprise Agreement

 

On June 22, 2009, the Company amended the Agreement with Scottish Enterprise (“SE”) (the “Amendment”), in order to allow the Company to implement a reduction of the Company’s research operations located in Scotland in exchange for the parties’ agreement to modify the payment terms of the Agreement in the principal amount of £5 million (approximately $8.0 million at December 31, 2009), which SE had previously entered into with the Company. The Agreement provided for repayment of up to £5 million in the event the Company significantly reduced its Scottish research operations. Pursuant to the terms of the Amendment, in association with Cyclacel’s material reduction in staff at its Scottish research facility, the parties agreed to a modified payment of £1 million (approximately $1.7 million at June 22, 2009) payable in two equal tranches. On July 1, 2009, the first installment of £0.5 million (approximately $0.8 million) was paid and the remaining amount of £0.5 million (approximately $0.8 million) was paid on January 6, 2010.

 

In addition, should a further reduction below current minimum staff levels be effectuated before July 2014 without SE’s prior consent, the Company may be obligated to pay up to £4 million to SE, which will be calculated as a maximum of £4 million (approximately $6.5 million at December 31, 2012 and September 30, 2013) less the market value of the shares held by SE at the time staffing levels in Scotland fall below the prescribed minimum levels. If the Company were to have reduced staffing levels below the prescribed levels, the amount potentially payable to SE would have been approximately £3.8 million (approximately $6.1 million) and approximately £3.8 million (approximately $6.2 million) at December 31, 2012 and September 30, 2013, respectively.

 

This arrangement is accounted for as a liability under ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”), and is measured at fair value. Changes in fair value are recognized in earnings. Due to the nature of the associated contingency and the likelihood of occurrence, the Company has concluded the fair value of this liability was approximately $20,000 at December 31, 2012 and September 30, 2013, respectively. The most significant inputs in estimating the fair value of this liability are the probabilities that staffing levels fall below the prescribed minimum and that the Company is unable or unwilling to replace such employees within the prescribed time period. At both December 31, 2012 and September 30, 2013, the Company used a scenario analysis model to arrive at the fair value of the Scottish Enterprise Agreement and assumed a 30% probability of falling below a minimum staffing level and a 1% probability that the occurrence of such an event would not be cured within the prescribed time period. At each reporting period, the inputs used to determine the fair value of the liability will be evaluated to determine whether adjustments are appropriate. Changes in the value of this liability are recorded in the consolidated statement of operations.

 

4.    PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

The following is a summary of prepaid expenses and other current assets at December 31, 2012 and September 30, 2013 (in $000s):

 

 

 

December 31,

 

September 30,

 

 

 

2012

 

2013

 

Research and development tax credit receivable

 

$

1,033

 

$

1,281

 

Prepayments

 

358

 

337

 

Grant receivable

 

 

366

 

Sales tax receivable

 

45

 

249

 

Deposits

 

153

 

153

 

Other current assets

 

10

 

54

 

 

 

$

1,599

 

$

2,440

 

 

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5.    ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consisted of the following (in $000s):

 

 

 

December 31,

 

September 30,

 

 

 

2012

 

2013

 

Accrued research and development

 

$

3,623

 

$

5,645

 

Accrued legal and professional fees

 

1,118

 

215

 

Other current liabilities

 

860

 

424

 

 

 

$

5,601

 

$

6,284

 

 

6. STOCK BASED COMPENSATION

 

ASC 718 requires compensation expense associated with share-based awards to be recognized over the requisite service period, which for the Company is the period between the grant date and the date the award vests or becomes exercisable. Most of the awards granted by the Company (and still outstanding), vest ratably over four years, with ¼ of the award vesting one year from the date of grant and 1/48 of the award granted vesting each month thereafter. Annual awards granted in December 2010 vest 1/48 of the award each month after the grant date. Certain awards made to executive officers vest over three to five years, depending on the terms of their employment with the Company.

 

The Company recognizes all share-based awards issued after the adoption of ASC 718 under the straight-line attribution method. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company evaluates its forfeiture assumptions quarterly and the expected forfeiture rate is adjusted when necessary. Ultimately, the actual expense recognized over the vesting period is based solely on those shares that vest.

 

Stock based compensation has been reported within expense line items on the consolidated statement of operations for the three and nine months ended September 30, 2012 and 2013 as shown in the following table (in $000s):

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

General and administrative

 

$

59

 

82

 

$

202

 

199

 

Research and development

 

16

 

15

 

49

 

44

 

Discontinued operations

 

1

 

 

36

 

 

Stock-based compensation costs before income taxes

 

$

76

 

$

97

 

$

287

 

$

243

 

 

2006 Plan

 

On March 16, 2006, the 2006 Plan was adopted, under which Cyclacel may make equity incentive grants to its officers, employees, directors and consultants. At the Company’s annual shareholder meeting on May 23, 2012, the stockholders approved and amended the number of shares reserved under the 2006 Plan to 1,428,571 shares of the Company’s common stock, up from 742,857 shares. Stock option awards granted under the 2006 Plan have a maximum life of 10 years and generally vest over a four-year period from the date of grant.

 

There were 33,571 and 32,697 options granted during the nine months ended September 30, 2012 and 2013, respectively.

 

During the nine months ended September 30, 2012, 15,438 options were exercised for proceeds of approximately $48,000. There were no stock options exercised during the nine months ended September 30, 2013.

 

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Outstanding Options

 

A summary of the share option activity and related information is as follows:

 

Cyclacel Pharmaceuticals, Inc.

 

Number of
options
outstanding

 

Weighted
average
exercise
price

 

Weighted
average
remaining
contractual
term (years)

 

Aggregate
intrinsic
value ($000)

 

Options outstanding at December 31, 2012

 

463,023

 

$

26.61

 

5.58

 

$

347

 

Granted

 

32,697

 

$

3.01

 

 

 

 

 

Exercised

 

 

$

 

 

 

 

 

Cancelled/forfeited

 

(8,001

)

$

18.55

 

 

 

 

 

Options outstanding at September 30, 2013

 

487,719

 

$

25.16

 

5.20

 

178

 

Unvested at September 30, 2013

 

76,885

 

$

6.07

 

8.56

 

57

 

Vested and exercisable at September 30, 2013

 

410,834

 

$

28.74

 

4.57

 

121

 

 

The fair value of the stock options granted is calculated using the Black-Scholes option-pricing model as prescribed by ASC 718.

 

The expected term assumption is estimated using past history of early exercise behavior and expectations about future behaviors.

 

Estimates of pre-vesting option forfeitures are based on the Company’s experience. Currently the Company uses a forfeiture rate of 0 — 30% depending on when and to whom the options are granted. The Company adjusts its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment in the period of change and may impact the amount of compensation expense to be recognized in future periods.

 

The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

 

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, Cyclacel uses the weighted average of the two Federal Reserve securities closest to the expected term of the employee option.

 

Restricted Stock Units

 

The Company issued 12,281 and 85,097 restricted stock units to employees during the nine months ended September 30, 2012 and 2013, respectively. A restricted stock unit grant is accounted for at fair value at the date of grant which is equivalent to the market price of a share of the Company’s common stock, and an expense is recognized over the vesting term. The 2013 restricted stock units will vest upon the fulfillment of certain clinical and financial conditions and will terminate if they have not vested by December 31, 2014. The Company determined that the satisfaction of the vesting criteria was not probable at September 30, 2013 and, as a result, did not record any expense related to these awards for the nine months ended September 30, 2013.

 

Summarized information for restricted stock unit activity for the nine months ended September 30, 2013 is as follows:

 

 

 

Restricted Stock
Units

 

Weighted Average
Grant
Date Value Per Share

 

Non-vested at December 31, 2012

 

39,377

 

$

5.34

 

Granted

 

85,097

 

$

5.71

 

Forfeited

 

(5,226

)

$

5.00

 

Non-vested at September 30, 2013

 

119,248

 

$

5.62

 

 

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7.   COMMITMENTS AND CONTINGENCIES

 

Distribution, Licensing and Research Agreements

 

The Company has entered into licensing agreements with academic and research organizations. Under the terms of these agreements, the Company has received licenses to technology and patent applications. The Company is required to pay royalties on future sales of product employing the technology or falling under claims of patent applications.

 

Pursuant to the Daiichi Sankyo license under which the Company licenses certain patent rights for sapacitabine, its lead drug candidate, the Company is under an obligation to use reasonable endeavors to develop a product and obtain regulatory approval to sell a product and has agreed to pay Daiichi Sankyo an up-front fee, reimbursement for Daiichi Sankyo’s enumerated expenses, milestone payments and royalties on a country-by-country basis. The up-front fee, Phase 3 entry milestone, and certain past reimbursements have been paid. A further $10.0 million in aggregate milestone payments could be payable subject to achievement of all the specific contractual milestones and the Company’s decision to continue with these projects. Royalties are payable in each country for the term of patent protection in the country or for ten years following the first commercial sale of licensed products in the country, whichever is later. Royalties are payable on net sales. Net sales are defined as the gross amount invoiced by the Company or its affiliates or licensees, less discounts, credits, taxes, shipping and bad debt losses. The agreement extends from its commencement date to the date on which no further amounts are owed under it. If the Company wishes to appoint a third party to develop or commercialize a sapacitabine-based product in Japan, within certain limitations, Daiichi Sankyo must be notified and given a right of first refusal to develop and/or commercialize in Japan. In general, the license may be terminated by the Company for technical, scientific, efficacy, safety, or commercial reasons on nine months’ notice, or twelve months, if after a launch of a sapacitabine-based product, or by either party for material default.

 

Legal Proceedings

 

On April 27, 2010, the Company was served with a complaint filed by Celgene Corporation in the United States District Court for the District of Delaware seeking a declaratory judgment that four of the Company’s own patents, claiming certain uses of romidepsin were invalid and not infringed by Celgene’s sale of ISTODAX® (romidepsin for injection). The Company subsequently counterclaimed for infringement of these four patents. On April 3, 2013, the Company entered into a definitive agreement with Celgene to sell to Celgene the four Cyclacel-owned patents related to uses of romidepsin and their foreign counterparts. In connection with the definitive agreement, in April 2013, Celgene made a one-time payment of $5.5 million to Cyclacel. As a result, the litigation between Cyclacel and Celgene in the United States District Court for the District of Delaware, case number 1:10-cv-00348-GMS, was dismissed by virtue of a jointly filed stipulation requesting the Court to enter an Order dismissing the litigation and the entry of such an Order. The $5.5 million sale of patents has been recorded in other income (expense), net, in the consolidated statement of operations for the nine months ended September 30, 2013.

 

8.   STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

As of September 30, 2013, there were 335,273 shares of the Company’s 6% Convertible Exchangeable Preferred Stock (“Preferred Stock”) issued and outstanding at an issue price of $10.00 per share. Dividends on the Preferred Stock are cumulative from the date of original issuance 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 Company’s Board of Directors (the “Board”) 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.

 

The Preferred Stock is convertible at the option of the holder at any time into the Company’s shares of common stock at a conversion rate of approximately 0.06079 shares of common stock for each share of Preferred Stock based on a price of $164.50. The Company has reserved 20,381 shares of common stock for issuance upon conversion of the remaining shares of Preferred Stock outstanding at September 30, 2013.

 

The Company may automatically convert the Preferred Stock into common stock if the closing price of the Company’s common stock has exceeded $246.75, 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.

 

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The Preferred Stock has no maturity date and no voting rights prior to conversion into common stock, except under limited circumstances.

 

The Company may, at its option, redeem the Preferred Stock in whole or in part, out of funds legally available at the redemption prices per share stated below, plus an amount equal to accrued and unpaid dividends up to the date of redemption:

 

Year from November 1, 2012 to October 31, 2013

 

$

10.12

 

Year from November 1, 2013 to October 31, 2014

 

$

10.06

 

November 1, 2014 and thereafter

 

$

10.00

 

 

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 Company’s 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. No such exchanges have taken place to date.

 

Conversion of Convertible Preferred Stock

 

During the nine months ended September 30, 2013, the Company converted an aggregate of 877,869 shares of Preferred Stock into an aggregate of 1,684,471 shares of the Company’s common stock. The Company converted 85,409 shares of Preferred Stock into 170,818 shares of the Company’s common stock during the three months ended September 30, 2013. There were no conversions of the Company’s Preferred Stock into shares of common stock during the nine months ended September 30, 2012. Since the Company’s transaction with Xcyte Therapies, Inc. in 2006, holders have exchanged 1,711,540 shares of Preferred Stock into common stock as a result of arms-length negotiations between the Company and the other parties. The shares of previously-converted Preferred Stock have been retired, cancelled and restored to the status of authorized but unissued shares of preferred stock, subject to reissuance by the Board of Directors as shares of Preferred Stock of one or more series.

 

The table below provides details of the aggregate activities in 2013:

 

 

 

Nine
Months Ended
September 30,
2013

 

Preferred shares exchanged

 

877,869

 

Shares of common stock issued:

 

 

 

At stated conversion terms

 

53,366

 

Incremental shares issued under the exchange transaction

 

1,631,105

 

Total shares of common stock issued

 

1,684,471

 

 

As the Preferred stockholders received additional shares of common stock issued to them upon conversion as compared to what they would have been entitled to receive under the stated rate of exchange, the Company recorded the excess of (1) the fair value of all securities and other consideration transferred to the holders of the Preferred Stock and (2) the fair value of securities issuable pursuant to the original conversion terms as a deemed dividend resulting in an increase in the net loss attributable to common shareholders. Specifically, the Company recorded deemed dividends related to the additional shares issued under the exchange transactions of $0.7 million and $9.0 million for the three and nine months ended September 30, 2013, respectively.

 

On each of January 11, 2013, April 5, 2013, and July 8, 2013, the Board declared a quarterly cash dividend in the amount of  $0.15 per share on the Company’s Preferred Stock with respect to the fourth quarter of 2012, first quarter of 2013, and second quarter of 2013, respectively. The Company paid the dividends on February 1, 2013, May 1, 2013, and August 1, 2013, respectively.

 

Common Stock

 

May 2013 Underwriting Agreement

 

On May 16, 2013, the Company entered into an underwriting agreement relating to the public offering and sale of up to 6,666,667 shares of the Company’s common stock, par value $0.001, at a price to the public of $3.00 per share.  On May 21, 2013, the Company closed the public offering and completed the sale of 6,833,334 shares of its common stock, which includes 166,667 shares that were subject to the underwriters’ over-allotment option, at a price to the public of $3.00 per share, for proceeds, net of certain fees and expenses, of approximately $19.0 million.

 

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Common Stock Bonus

 

During the nine months ended September 30, 2013, the Company issued 31,643 shares of common stock with a fair value of approximately $0.2 million to employees in lieu of cash in connection with bonuses recorded for the year ended December 31, 2012. There were no such stock issuances during the nine months ended September 30, 2012 or during the three months ended September 30, 2013.

 

December 2012 Stock Purchase Agreement

 

On December 14, 2012, the Company entered into a common stock purchase agreement with Aspire. Upon execution of the Purchase Agreement, Aspire purchased 158,982 shares of common stock for an aggregate purchase price of $1.0 million based the closing price of the Company’s common stock December 13, 2012, the date upon which the business terms were agreed. Under the terms of the Purchase Agreement, Aspire committed to purchase up to an additional 1,455,787 shares from time to time as directed by the Company over the next two years at prices derived from the market prices on or near the date of each sale. However, such commitment is limited to an additional $19.0 million of share purchases. In December 2012, in consideration for entering into the Purchase Agreement, the Company issued 74,548 shares of its common stock to Aspire in lieu of paying a commitment fee. During the nine months ended September 30, 2013, the Company sold all of the additional 1,455,787 shares of its common stock to Aspire allowed under the Purchase Agreement in consideration for aggregate proceeds of $6.6 million. The agreement terminated on November 14, 2013 and no rights or obligations remain under the agreement.

 

March 2012 Sale of Common Stock and Economic Rights

 

On March 22, 2012, the Company entered into a purchase agreement with certain existing institutional stockholders, raising approximately $2.9 million of proceeds, net of certain fees and expenses. The proceeds from the financing were to be used to fund litigation-related expenses on certain intellectual property and for general corporate purposes.

 

Under the terms of the purchase agreement, the investors purchased 669,726 shares of the Company’s common stock at a price of $4.53, which is equal to the 10-day average closing price of the Company’s common stock for the period ending on March 21, 2012. In addition to the common stock, investors received contractual rights to receive cash equal to 10% of any litigation settlement related to the specified intellectual property, subject to a cap. In certain defined situations, the Company may have to issue either additional shares or warrants. These additional rights were settled in April 2013 in connection with the resolution of the Celgene matter. The shares issued at closing were subject to a lock-up period of one year from the date of issuance. See Note 3 - Fair Value for further details.

 

Common Stock Warrants

 

The following table summarizes information about warrants outstanding at September 30, 2013:

 

Issued in Connection With

 

Expiration
Date

 

Common
Shares

Issuable

 

Weighted
Average
Exercise
Price

 

February 2007 stock issuance

 

2014

 

151,773

 

$

59.08

 

July 2009 Series II stock issuance

 

2014

 

98,893

 

$

7.00

 

January 2010 stock issuance

 

2015

 

101,785

 

$

22.82

 

January 2010 stock issuance

 

2015

 

100,714

 

$

19.95

 

October 2010 stock issuance

 

2015

 

594,513

 

$

13.44

 

July 2011 stock issuance

 

2016

 

544,117

 

$

9.52

 

Total

 

 

 

1,591,795

 

$

17.06

 

 

There were no exercises of warrants during the three and nine months ended September 30, 2012 and 2013.

 

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9.    DISCONTINUED OPERATIONS

 

On August 10, 2012, the Company entered into an agreement with Sinclair to terminate, effective September 30, 2012, the distribution agreements relating to the promotion and sale of Xclair®, Numoisyn® Lozenges and Numoisyn® Liquid.

 

Product revenue, cost of goods sold and selling, general and administrative costs related to the promotion and sales of the of Xclair®, Numoisyn® Liquid and Numoisyn® Lozenges have been reclassified from operating results from continuing operations to (loss) income from discontinued operations in the consolidated statement of operations for all periods presented as follows (in $000s):

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

Period from
August 13,
1996
(inception) to
September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

2013

 

Product revenue

 

$

302

 

$

 

$

583

 

$

 

$

3,604

 

Cost of goods sold

 

(110

)

 

(293

)

 

(2,045

)

Selling, general and administrative

 

(121

)

 

(578

)

 

(9,295

)

Goodwill and intangible impairment

 

 

 

 

 

(5,187

)

Interest income

 

 

20

 

 

70

 

102

 

Interest expense

 

 

 

 

 

(110

)

Gain on termination of license agreement

 

1,192

 

 

1,192

 

 

1,192

 

Income (loss) from discontinued operations

 

1,263

 

20

 

904

 

70

 

(11,739

)

Income tax on discontinued operations

 

 

(8

)

 

(28

)

(365

)

Net income (loss) from discontinued operations

 

$

1,263

 

$

12

 

$

904

 

$

42

 

$

(12,104

)

 

The assets and liabilities associated with product promotion and sales have been classified within assets and liabilities of discontinued operations in the accompanying consolidated balance sheets (in $000s):

 

 

 

December 31,
2012

 

September 30,
2013

 

 

 

 

 

 

 

Current assets of discontinued operations:

 

 

 

 

 

Short term portion of minimum royalty arrangement receivable, net

 

$

536

 

$

470

 

Returns indemnification receivable

 

325

 

322

 

Total current assets of discontinued operations

 

861

 

792

 

Long-term assets of discontinued operations:

 

 

 

 

 

Long-term portion of minimum royalty arrangement receivable, net

 

353

 

96

 

Total assets of discontinued operations

 

$

1,214

 

$

888

 

 

 

 

 

 

 

Current liabilities of discontinued operations:

 

 

 

 

 

Accounts payable

 

$

10

 

$

 

Returns provision

 

325

 

322

 

Total current liabilities of discontinued operations

 

$

335

 

$

322

 

 

The $0.6 million minimum royalty arrangement receivable outstanding as of September 30, 2013, relates to the present value of the remaining portion of the approximately $1.0 million in minimum royalty payments the Company will receive through September 30, 2015 under the terms of the termination and settlement agreement.

 

The Company offered a right of return on product sales made prior to the termination of the distribution agreements. The Company has estimated a provision for product returns of $0.3 million as of September 30, 2013 based on historical returns for each product, for which an offsetting asset has been recorded based on the terms of the termination and settlement agreement.

 

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10.   SUBSEQUENT EVENTS

 

Preferred Dividend

 

On September 10, 2013, the Board declared a quarterly cash dividend in the amount of $0.15 per share of the Preferred Stock. The cash dividend was paid on November 1, 2013 to the holders of record of the Preferred Stock as of the close of business on October 21, 2013.

 

The Company completed an evaluation of the impact of any subsequent events through the date financial statements were issued and determined there were no other subsequent events requiring disclosure in or adjustment to these financial statements.

 

Stock Purchase Agreement

 

From December 14, 2012 through November 14, 2013, the Company sold 1,689,317 shares of common stock to Aspire Capital Fund, LLC, or Aspire, in consideration of gross proceeds of $7.6 million pursuant to the terms of the common stock purchase agreement entered into with Aspire on December 14, 2012. The December 14, 2012 common stock purchase agreement was terminated on November 14, 2013, and, on that day, the Company entered into a new common stock purchase agreement with Aspire (the “Purchase Agreement”).  Upon execution of the Purchase Agreement, Aspire purchased 511,509 shares of common stock for an aggregate purchase price of $2.0 million. Under the terms of the Purchase Agreement, Aspire has committed to purchase up to an additional 3,042,038 shares from time to time as directed by the Company or, in certain instances, as agreed to by both parties, over the next two years at prices derived from the  market prices on or near the date of each sale.  However, such commitment is limited to an additional $18.0 million of share purchases.  In consideration for entering into the Purchase Agreement, concurrent with the execution of the Purchase Agreement, the Company issued 166,105 shares of the Company’s common stock to Aspire in lieu of a commitment fee.

 

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Item 2. Management’s 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, Management’s 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 that the forward-looking statements be covered by the safe harbor for forward-looking statements in 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, entitled “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2012, as updated and supplemented by Part II, Item 1A, entitled “Risk Factors,” of our Quarterly Reports 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

 

Our clinical development priorities are focused on sapacitabine in the following indications:

 

·                  Acute myeloid leukemia, or AML, in the elderly;

 

·                  Myelodysplastic syndromes, or MDS; and

 

·                  Solid tumors, including breast cancer, non-small cell lung cancer, or NSCLC, ovarian cancer and pancreatic cancer.

 

Sapacitabine is being evaluated in the SEAMLESS Phase 3 trial being conducted under a Special Protocol Assessment agreement, or SPA, with the US Food and Drug Administration (“FDA”) for the front-line treatment of AML in the elderly and in Phase 2 studies for MDS, lung cancer and chronic lymphocytic leukemia. Sapacitabine is also being evaluated in a Phase 1 study in combination with seliciclib in an orally-administered sequential treatment regimen in heavily-pretreated patients with advanced solid tumors, including those who are BRCA-mutation carriers. We have also evaluated seliciclib, a highly selective inhibitor of CDK -2, -7 and -9, in NSCLC and nasopharyngeal cancer (“NPC”). We will determine the feasibility of pursuing further development and/or partnering these assets and/or indications subject to available resources.

 

Our core area of expertise is in cell cycle biology and we focus primarily on the 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 have generated several families of anticancer drugs that act on the cell cycle including nucleoside analogues, cyclin dependent kinase, or CDK, inhibitors, PLK inhibitors and Aurora kinase/Vascular Endothelial Growth Factor Receptor 2 or AK/VEGFR 2 inhibitors.

 

Although a number of pharmaceutical and biotechnology companies are currently attempting to develop nucleoside analogues and CDK inhibitor drugs, we believe that our drug candidates are differentiated in that they are orally-available and interact with unique target profiles and mechanisms. For example we believe that our sapacitabine is the only orally-available nucleoside analogue presently being tested in Phase 3 trial in AML and in Phase 2 for MDS after failure of front line agents and seliciclib is an orally-available CDK2, -7 and -9 inhibitor currently in Phase 2 trials. Our resources are primarily directed towards advancing our lead drug candidate sapacitabine through in-house development activities. We are advancing our earlier stage novel drug series through a combination of government funding and external collaborators but with limited investment by us.

 

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We have worldwide rights to commercialize sapacitabine and seliciclib and our business strategy is to enter into selective partnership arrangements for these programs. Taken together, our pipeline covers all four phases of the cell cycle, which we believe will improve the chances of successfully developing and commercializing novel drugs that work on their own or in combination with approved conventional chemotherapies or with other targeted drugs to treat human cancers.

 

From our inception in 1996 through September 30, 2013, 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, 2013, our accumulated deficit during the development stage was $285.9 million. We expect to continue incurring substantial losses for the next several years as we continue to develop our clinical and pre-clinical drug candidates. Our operating expenses are comprised of research and development expenses and selling, general and administrative expenses.

 

Subsequent Events

 

Preferred Stock Dividend

 

On September 10, 2013, the Board declared a quarterly cash dividend in the amount of $0.15 per share of the Preferred Stock. The cash dividend was paid on November 1, 2013 to the holders of record of the Preferred Stock as of the close of business on October 21, 2013.

 

Our Common Stock Purchase Agreements with Aspire Capital Fund, LLC

 

On December 14, 2012, we entered into a common stock purchase agreement with Aspire Capital Fund, LLC, or Aspire Capital.  Pursuant to that agreement, we sold a total of 1,455,787 shares of common stock to Aspire Capital with aggregate gross proceeds to us of approximately $6.6 million. On November 14, 2013 we terminated that agreement and entered into a new stock purchase agreement with Aspire Capital.

 

The November 14, 2013 common stock purchase agreement with Aspire Capital (the “Purchase Agreement”), provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $20.0 million of shares of our common stock over the 24-month term of the agreement.

 

Concurrently with entering into the Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital dated November 14, 2013 (the “Registration Rights Agreement”). The Registration Rights Agreement provides, among other things, that the Company will register the sale of the Purchase Shares to Aspire Capital.  In accordance with the Registration Rights Agreement, the sale of the Purchase Shares to Aspire Capital is being made under the Company’s Registration Statement on Form S-3 (File No. 333-187801), filed with the Securities and Exchange Commission on April 8, 2013, as amended and supplemented from time to time (the “Registration Statement”). The Company further agreed to keep the Registration Statement effective and to indemnify Aspire Capital for certain liabilities in connection with the sale of the Securities under the terms of the Registration Rights Agreement.

 

As described in more detail below, generally under the Purchase Agreement the Company has two ways it can elect to sell shares of common stock to Aspire Capital on any business day the Company selects: (1) through a regular purchase of up to 100,000 shares at a known price based on the market price of our common stock prior to the time of each sale, and (2) through a VWAP purchase of a number of shares up to 30% of the volume traded on the purchase date at a price equal to the lessor of the closing sale price or 96% of the volume weighted average price for such purchase date.

 

Under the Purchase Agreement, the Company initially will issue 166,105 shares of its common stock to Aspire Capital in consideration for entering into the Purchase Agreement (the “Commitment Shares”). Immediately upon Commencement (as defined in the Purchase Agreement), the Company will sell 511,509 shares to Aspire Capital for an aggregate purchase price of $2,000,000 (the “Initial Shares”.) After the filing of the prospectus supplement, on any business day on which the closing sale price of the Company’s common stock equals or exceeds $1.00 per share, over the 24-month term of the Purchase Agreement, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 100,000 Purchase Shares per business day; however, no sale pursuant to such Purchase Notice may exceed five hundred thousand dollars ($500,000) per business day, unless the Buyer and the Company mutually agree. The Company and Aspire Capital also may mutually agree to increase the number of shares that may be sold per business day to as much as an additional 1,000,000 shares per business day.  The purchase price per Purchase Share pursuant to such Purchase Notice (the “Purchase Price”) is the lower of

 

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(i) the lowest sale price for the Company’s common stock on the date of sale or (ii) the arithmetic average of the three lowest closing sale prices for the Company’s common stock during the twelve consecutive business days ending on the business day immediately preceding the purchase date of those securities. The applicable Purchase Price will be determined prior to delivery of any Purchase Notice.

 

In addition, on any date on which the Company submits a Purchase Notice to Aspire Capital in the amount of at least 100,000 Purchase Shares, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of the Company’s common stock equal to a percentage (not to exceed 30%) of the aggregate shares of common stock traded on the next business day (the “VWAP Purchase Date”), subject to a maximum number of shares determined by the Company (the “VWAP Purchase Share Volume Maximum”). The purchase price per Purchase Share pursuant to such VWAP Purchase Notice (the “VWAP Purchase Price”) shall be the lower of (i) the closing sale price on the date of sale and (ii) 96% of the volume weighted average price for the Company’s common stock traded on the Nasdaq Global Market on (A) the VWAP Purchase Date if the aggregate shares to be purchased on that date does not exceed the VWAP Purchase Share Volume Maximum, or (B) the portion of such business day until such time as the aggregate shares to be purchased will equal the VWAP Purchase Share Volume Maximum. Further, if the sale price of the Company’s common stock falls on the VWAP Purchase Date below the greater of (i) 90% of the closing price of our common stock on the business day immediately preceding the VWAP Purchase Date or (ii) the price set by us in the VWAP Purchase Notice (the “VWAP Minimum Price Threshold”), the VWAP Purchase Price will be determined using the percentage in the VWAP Purchase Notice of the total shares traded for such portion of the VWAP Purchase Date prior to the time that the sale price of the Company’s common stock fell below the VWAP Minimum Price Threshold and the volume weighted average price of the common stock sold during such portion of the VWAP Purchase Date prior to the time that the sale price of the common stock fell below the VWAP Minimum Price Threshold.

 

The number of Purchase Shares covered by, and the timing of, each Purchase Notice or VWAP Purchase Notice are determined by the Company, at its sole discretion. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed. There are no trading volume requirements or restrictions under the Purchase Agreement. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases as directed in accordance with the Purchase Agreement.

 

The Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions. The Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost or penalty. Aspire Capital has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s common stock. The Company did not pay any additional amounts to reimburse or otherwise compensate Aspire Capital in connection with the transaction other than the Commitment Shares. There are no limitations on use of proceeds,

 

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financial or business covenants, restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement.

 

The Company’s net proceeds will depend on the Purchase Price, the VWAP Purchase Price and the frequency of the Company’s sales of Purchase Shares to Aspire Capital; provided, however, that the maximum aggregate proceeds from sales of Purchase Shares, including the Initial Shares, is $20.0 million under the terms of the Purchase Agreement. The Company’s delivery of Purchase Notices and VWAP Purchase Notices will be made subject to market conditions, in light of the Company’s capital needs from time to time and under the limitations contained in the Purchase Agreement. The Company expects to use proceeds from sales of Purchase Shares for general corporate purposes and working capital requirements.

 

The foregoing description of the Purchase Agreement and the Registration Rights Agreement is not a complete description of all the terms of those agreements. For a complete description of all the terms, we refer you to the full text of the Purchase Agreement and Registration Rights Agreement, copies of which are filed herewith as Exhibit 10.1 and Exhibit 4.1, to this Quarterly Report on Form 10-Q.

 

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Results of Operations

 

Three Months Ended September 30, 2012 and 2013

 

Results of Continuing Operations

 

Revenues

 

The following table summarizes the components of our revenues for the three months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Three months
ended September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Grant revenue

 

$

38

 

$

309

 

$

271

 

713

 

 

We recognized $38,000 and $0.3 million in grant revenue for the three months ended September 30, 2012 and 2013, respectively, from the European Union and the UK Government’s Biomedical Catalyst.

 

The future

 

We expect to recognize approximately $1.1 million in grant revenue over the next two years from the UK Government’s Biomedical Catalyst and approximately $26,000 in grant revenue over the next twelve months from the European Union. We may also recognize, from time to time, revenue from collaboration and research and development and from grant awards. We had no collaboration and research and development revenue for the three months ended September 30, 2012 and 2013.

 

Research and development expenses

 

From our inception, we have focused on drug discovery and development programs, with particular emphasis on orally-available anticancer agents and our research and development expenses have represented costs incurred to discover and develop novel small molecule therapeutics, including clinical trial costs for sapacitabine, seliciclib, and sapacitabine in combination with seliciclib. We have also incurred costs in the advancement of product candidates toward clinical and pre-clinical trials and the development of in-house research 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:

 

·                  Clinical trial and regulatory-related costs;

 

·                  Payroll and personnel-related expenses, including consultants and contract research;

 

·                  Preclinical studies and laboratory supplies and materials;

 

·                  Technology license costs; and

 

·                  Rent and facility expenses for our laboratories.

 

The following table provides information with respect to our research and development expenditures for the three months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Three months
ended September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Sapacitabine

 

$

1,424

 

$

4,233

 

$

2,809

 

197

 

Other costs related to research and development programs, management and exploratory research

 

108

 

342

 

234

 

217

 

Total research and development expenses

 

$

1,532

 

$

4,575

 

$

3,043

 

199

 

 

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Total research and development expenses represented 43% and 75% of our operating expenses for the three months ended September 30, 2012 and 2013, respectively.

 

Research and development expenditures increased by $3.0 million to $4.6 million for the three months ended September 30, 2013 from $1.5 million for the three months ended September 30, 2012. The increase was primarily due to clinical trial and capsule manufacture costs for the SEAMLESS Phase 3 trial.

 

The future

 

We will continue to concentrate our resources on the development of sapacitabine. We anticipate that overall research and development expenditures for the year ended December 31, 2013 will increase compared to the year ended December 31, 2012, as we continue to enroll the randomized portion of the SEAMLESS pivotal Phase 3 trial and increase our involvement in grant-supported work.

 

General and administrative expenses

 

General and administrative expenses include costs for administrative personnel, legal and other professional expenses and general corporate expenses. The following table summarizes the general and administrative expenses for the three months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Three months ended
September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Total general and administrative expenses

 

$

2,028

 

$

1,529

 

$

(499

)

(25

)

 

Total general and administration expenses represented 57% and 25% of our operating expenses for the three months ended September 30, 2012 and 2013, respectively.

 

Our general and administrative expenditure decreased by approximately $0.5 million, from $2.0 million for the three months ended September 30, 2012, to $1.5 million for the three months ended September 30, 2013. The decrease in expenses was primarily attributable to a net decrease in compensation and professional costs of approximately $0.4 million.

 

The future

 

We expect our general and administrative expenditures for the year ended December 31, 2013 to be lower than our expenditures for the year ended December 31, 2012.

 

Other income (expense)

 

The following table summarizes other income (expense) for the three months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Three months ended
September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Change in valuation of Economic Rights

 

$

(63

)

$

 

$

63

 

100

 

Change in valuation of liabilities measured at fair value

 

1

 

 

(1

)

(100

)

Foreign exchange gains

 

6

 

25

 

19

 

317

 

Interest income

 

5

 

8

 

3

 

60

 

Other income (expense), net

 

1

 

16

 

15

 

1,500

 

Total other (expense) income

 

$

(50

)

$

49

 

$

99

 

198

 

 

Total other (expense) income increased by approximately $0.1 million, from a loss of approximately $50,000 for the three months ended September 30, 2012, to income of $50,000 for the three months ended September 30, 2013.

 

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Change in valuation of Economic Rights

 

These Economic Rights were classified as liabilities and marked to market each reporting period until their settlement in April 2013. The change in valuation of Economic Rights decreased approximately $63,000 for the three months ended September 30, 2012. There was no change in the valuation of Economic Rights for the three months ended September 30, 2013 as the Economic Rights were settled by a $0.6 million payment to the holders in April 2013.

 

Change in valuation of liabilities measured at fair value

 

The change in valuation of liabilities measured at fair value relates to the warrants to purchase shares of our common stock under the registered direct financing completed in February 2007 and our liability under an agreement with the Scottish Enterprise, or SE, that would potentially require us to make a payment to SE should staffing levels in Scotland fall below prescribed minimum levels. The warrants and agreement are classified as liabilities. The value of the warrants and the SE Agreement are being marked to market each reporting period as a gain or loss. Such gains or losses will continue to be reported for the warrants until they are exercised or expired. Gains or losses on the SE Agreement will be reported until the agreement expires in July 2014. For the three months ended September 30, 2012, the change in the valuation of liabilities measured at fair value was an increase of $1,000. There was no change in the valuation of liabilities measured at fair value for the three months ended September 30, 2013.

 

Foreign exchange gains

 

Foreign exchange gains increased by $19,000, from a gain of approximately $6,000 for the three months ended September 30, 2012, to a gain of $25,000 for the three months ended September 30, 2013. Foreign exchange gains (losses) are reported in the consolidated statement of operations as a separate line item within other income (expense).

 

Other income (expense), net

 

We recognized approximately $1,000 in other income (expense), net during the three months ended September 30, 2012. We recognized approximately $16,000 in other income (expense), net during the three months ended September 30, 2013.

 

The future

 

The warrants liability and SE Agreement will continue to be re-measured at the end of each reporting period. The valuation of the warrants is not expected to change based on the exercise price relative to the market price per share of our common stock and the February 2014 expiration. The valuation of the SE Agreement is dependent on a number of factors, including our stock price and the probability of the occurrence of certain events that would give rise to a payment. We do not expect the valuation of fair value of the SE Agreement to fluctuate significantly. The litigation underlying the Economic Rights valuation was settled in April 2013.

 

As the nature of funding advanced through intercompany loans is that of a long-term investment in nature, unrealized foreign exchange gains and losses on such funding will be recognized in other comprehensive income until repayment of the intercompany loan becomes foreseeable.

 

Income tax benefit

 

Credit is taken for research and development tax credits, which are claimed from the United Kingdom’s revenue and customs authority, or HMRC, in respect of qualifying research and development costs incurred.

 

The following table summarizes the income tax benefit for the three months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Three months ended
September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Total income tax benefit

 

$

419

 

$

730

 

$

311

 

74

 

 

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The total income tax benefit increased approximately $0.3 million to an income tax benefit of $0.7 million for the three months ended September 30, 2013 from an income tax benefit of $0.4 million for the three months ended September 30, 2012. Research and development tax credits recoverable increased by approximately $0.3 million to $0.7 million for the three months ended September 30, 2013 from $0.4 million for the three months ended September 30, 2012. The level of tax credits recoverable is linked directly to qualifying research and development expenditure incurred in any one year. Prior to the third quarter of 2012, these credits were restricted to the payroll taxes paid by us to the HMRC in that year. However, in July 2012, legislation was passed to eliminate this restriction for the year ended December 31, 2012 and subsequent periods. During the three months ended September 30, 2012, we recorded additional tax benefits related to research and development expenditures made in the first two quarters of 2012 as a result of the retroactive application of newly passed legislation.

 

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. The amount of tax credits we will receive is entirely dependent on the amount of eligible expenses we incur. We expect our qualifying research and development expenditure, and thus our tax credit, will remain the same or increase for the year ended December 31, 2013.

 

Results of Discontinued Operations

 

The following table summarizes our net income from discontinued operations for the three months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Three months ended
September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Income from discontinued operations

 

$

1,263

 

$

20

 

$

(1,243

)

(98

)

Income tax on discontinued operations

 

 

(8

)

(8

)

 

Net income from discontinued operations

 

$

1,263

 

$

12

 

$

(1,251

)

(99

)

 

In August 2012, we entered into a termination and settlement agreement with Sinclair to terminate, effective September 30, 2012, our license to distribute the ALIGN products, after which we no longer generated product revenue. The operating results associated with the ALIGN products are classified within net income (loss) from discontinued operations in the consolidated statements of operations for the three months ended September 30, 2012 and 2013.

 

The net income from discontinued operations of approximately $12,000 in the three months to September 30, 2013 is the amortization of the discount on the minimum royalty arrangement, net of applicable taxes. Net income from discontinued operations for the three months ended September 30, 2012 was $1.3 million, $1.2 million of which is the gain on termination of the distribution agreements.

 

The future

 

We have ceased operations associated with the ALIGN products effective September 30, 2012 and do not expect significant activity going forward. We may earn additional income from discontinued operations over the next three years if certain sales targets are met by a successor distributor according to the termination agreement with Sinclair.

 

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Nine months Ended September 30, 2012 and 2013

 

Results of Continuing Operations

 

Revenues

 

The following table summarizes the components of our revenues for the nine months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Nine months
ended September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Grant revenue

 

$

64

 

$

785

 

$

721

 

1,127

 

 

We recognized $0.1 million and $0.8 million in grant revenue for the nine months ended September 30, 2012 and 2013, respectively, from the European Union and the UK Government’s Biomedical Catalyst.

 

The future

 

We expect to recognize approximately $1.1 million in grant revenue over the next two years from the UK Government’s Biomedical Catalyst and approximately $26,000 in grant revenue over the next twelve months from the European Union. We may also recognize, from time to time, revenue from collaboration and research and development and from grant awards. We had no collaboration and research and development revenue for the nine months ended September 30, 2012 and 2013.

 

Research and development expenses

 

From our inception, we have focused on drug discovery and development programs, with particular emphasis on orally-available anticancer agents and our research and development expenses have represented costs incurred to discover and develop novel small molecule therapeutics, including clinical trial costs for sapacitabine, seliciclib, and sapacitabine in combination with seliciclib. We have also incurred costs in the advancement of product candidates toward clinical and pre-clinical trials and the development of in-house research 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:

 

·                  Clinical trial and regulatory-related costs;

 

·                  Payroll and personnel-related expenses, including consultants and contract research;

 

·                  Preclinical studies and laboratory supplies and materials;

 

·                  Technology license costs; and

 

·                  Rent and facility expenses for our laboratories.

 

The following table provides information with respect to our research and development expenditures for the nine months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Nine months
ended September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Sapacitabine

 

$

4,488

 

$

7,859

 

$

3,371

 

75

 

Other costs related to research and development programs, management and exploratory research

 

108

 

927

 

819

 

758

 

Total research and development expenses

 

$

4,596

 

$

8,786

 

$

4,190

 

91

 

 

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Total research and development expenses represented 44% and 59% of our operating expenses for the nine months ended September 30, 2012 and 2013, respectively.

 

Research and development expenditures increased by $4.2 million to $8.8 million for the nine months ended September 30, 2013 from $4.6 million for the nine months ended September 30, 2012. The increase was primarily due to clinical trial and capsule manufacture costs for the SEAMLESS Phase 3 trial.

 

The future

 

We will continue to concentrate our resources on the development of sapacitabine. We anticipate that overall research and development expenditures for the year ended December 31, 2013 will increase compared to the year ended December 31, 2012, as we continue to enroll the randomized portion of the SEAMLESS pivotal Phase 3 trial and increase our involvement in grant supported work.

 

General and administrative expenses

 

General and administrative expenses include costs for administrative personnel, legal and other professional expenses and general corporate expenses. The following table summarizes the general and administrative expenses for the nine months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Nine months ended
September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Total general and administrative expenses

 

$

5,917

 

$

5,999

 

$

82

 

1

 

 

Total general and administration expenses represented 56% and 41% of our operating expenses for the nine months ended September 30, 2012 and 2013, respectively.

 

Our general and administrative expenditure increased by approximately $0.1 million from $5.9 million for the nine months ended September 30, 2012, to $6.0 million for the nine months ended September 30, 2013.

 

The future

 

We expect our general and administrative expenditures for the year ended December 31, 2013 to be lower than our expenditures for the year ended December 31, 2012.

 

Other income (expense)

 

The following table summarizes other income (expense) for the nine months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Nine months ended
September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Change in valuation of Economic Rights

 

$

27

 

$

570

 

$

543

 

2,011

 

Change in valuation of liabilities measured at fair value

 

51

 

 

(51

)

(100

)

Foreign exchange gains

 

237

 

44

 

(193

)

(81

)

Interest income

 

17

 

12

 

(5

)

(29

)

Other income (expense), net

 

77

 

5,520

 

5,443

 

7,069

 

Total other income

 

$

409

 

$

6,146

 

$

5,737

 

1,403

 

 

Total other income increased by approximately $5.7 million, from income of approximately $0.4 million for the nine months ended September 30, 2012, to income of $6.1 million for the nine months ended September 30, 2013. The increase was primarily due to the $5.5 million increase in other income (expense), net as a result of the Celgene settlement.

 

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Change in valuation of Economic Rights

 

The change in valuation of Economic Rights is related to the Economic Rights sold in connection with the purchase agreement completed in March 2012. These collective rights were classified as liabilities and marked to market each reporting period until their settlement in April 2013. The change in valuation of Economic Rights increased approximately $0.5 million from an approximately $27,000 gain for the nine months ended September 30, 2012 to a $0.6 million gain for the nine months ended September 30, 2013. The valuation of the Economic Rights during the nine months ended September 30, 2013 was estimated based on the actual amount owed and paid to the holders in April 2013 which was $0.6 million.

 

Change in valuation of liabilities measured at fair value

 

The change in valuation of liabilities measured at fair value relates to the warrants to purchase shares of our common stock under the registered direct financing completed in February 2007 and our liability under an agreement with the Scottish Enterprise, or SE, that would potentially require us to make a payment to SE should staffing levels in Scotland fall below prescribed minimum levels. The warrants and agreement are classified as liabilities. The value of the warrants and the SE Agreement are being marked to market each reporting period as a gain or loss. Such gains or losses will continue to be reported for the warrants until they are exercised or expired. Gains or losses on the SE Agreement will be reported until the agreement expires in July 2014. For the nine months ended September 30, 2012, the change in the valuation of liabilities measured at fair value was an increase of approximately $0.1 million. There was no change in the valuation of other liabilities measured at fair value for the nine months ended September 30, 2013.

 

Foreign exchange gains

 

Foreign exchange gains decreased by $0.2 million, from a gain of $0.2 million for the nine months ended September 30, 2012, to a gain of $44,000 for the nine months ended September 30, 2013. Foreign exchange gains (losses) are reported in the consolidated statement of operations as a separate line item within other income (expense).

 

Other income (expense), net

 

We recognized approximately $0.1 million in other income (expense), net during the nine months ended September 30, 2012. We recognized approximately $5.5 million in other income (expense), net during the nine months ended September 30, 2013 as a result of the sale of four Cyclacel-owned patents to Celgene.

 

The future

 

The warrants liability, and SE Agreement will continue to be re-measured at the end of each reporting period. The valuation of the warrants is not expected to change based on the exercise price relative to the market price per share of our common stock and the February 2014 expiration. The valuation of the SE Agreement is dependent on a number of factors, including our stock price and the probability of the occurrence of certain events that would give rise to a payment. We do not expect the valuation of fair value of the SE Agreement to fluctuate significantly. The litigation underlying the Economic Rights valuation was settled in April 2013.

 

As the nature of funding advanced through intercompany loans is that of a long-term investment in nature, unrealized foreign exchange gains and losses on such funding will be recognized in other comprehensive income until repayment of the intercompany loan becomes foreseeable.

 

Income tax benefit

 

Credit is taken for research and development tax credits, which are claimed from the United Kingdom’s revenue and customs authority, or HMRC, in respect of qualifying research and development costs incurred.

 

The following table summarizes the income tax benefit for the nine months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Nine months ended
September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Total income tax benefit

 

$

714

 

$

1,218

 

$

504

 

71

 

 

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The total income tax benefit increased approximately $0.5 million to $1.2 million for the nine months ended September 30, 2013 from $0.7 million for the nine months ended September 30, 2012. Research and development tax credits recoverable increased by approximately $0.5 million to $1.2 million for the nine months ended September 30, 2013 from $0.7 million for the nine months ended September 30, 2012. The level of tax credits recoverable is linked directly to qualifying research and development expenditure incurred in any one year.

 

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. The amount of tax credits we will receive is entirely dependent on the amount of eligible expenses we incur. We expect our qualifying research and development expenditure, and thus our tax credit, will increase for the year ended December 31, 2013.

 

Results of Discontinued Operations

 

The following table summarizes our net income from discontinued operations for the nine months ended September 30, 2012 and 2013 (all numbers in table are in thousands except percentages):

 

 

 

Nine months ended
September 30,

 

Difference

 

 

 

2012

 

2013

 

$

 

%

 

Income from discontinued operations

 

$

904

 

$

70

 

$

(834

)

(92

)

Income tax on discontinued operations

 

 

(28

)

(28

)

 

Net income from discontinued operations

 

$

904

 

$

42

 

$

(862

)

(95

)

 

In August 2012, we entered into a termination and settlement agreement with Sinclair to terminate, effective September 30, 2012, our license to distribute the ALIGN products, after which we no longer generated product revenue. The operating results associated with the ALIGN products are classified within net income (loss) from discontinued operations in the consolidated statements of operations for the nine months ended September 30, 2012 and 2013.

 

The net income from discontinued operations of approximately $42,000 in the nine months to September 30, 2013 is the amortization of the discount on the minimum royalty arrangement, net of applicable taxes.  Net income from discontinued operations for the nine months ended September 30, 2012 was a gain of $0.9 million, which includes the $1.2 million gain on termination of the distribution agreements, offset by cost of goods sold and selling, general and administrative expenses associated with operations that ceased in September 2012.

 

The future

 

We have ceased operations associated with the ALIGN products effective September 30, 2012 and do not expect significant activity going forward. We may earn additional income from discontinued operations over the next three years if certain sales targets are met by a successor distributor according to the termination agreement with Sinclair.

 

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Liquidity and Capital Resources

 

The following is a summary of our key liquidity measures at December 31, 2012 and September 30, 2013 (all numbers in table are in thousands except percentages):

 

 

 

December 31,
2012

 

September 30,
2013

 

$ Difference

 

%
Difference

 

Cash and cash equivalents

 

$

16,412

 

$

34,487

 

$

18,075

 

110

 

 

 

 

 

 

 

 

 

 

 

Working capital:

 

 

 

 

 

 

 

 

 

Current assets

 

$

18,872

 

$

37,719

 

$

18,847

 

100

 

Current liabilities

 

(9,335

)

(8,978

)

(357

)

(4

)

Working capital

 

$

9,537

 

$

28,741

 

$

19,204

 

201

 

 

At September 30, 2013, we had cash and cash equivalents of $34.5 million as compared to $16.4 million at December 31, 2012. The increase in balance was primarily due to $19.0 million in proceeds from the issuance of common stock under an underwriting agreement closed in May 2013.

 

Since our inception, we have generated a limited amount of product revenues from ALIGN product sales, which are presented within loss from discontinued operations, net of tax. The ALIGN product revenues ceased on September 30, 2012. We have relied primarily on the proceeds from sales of common and preferred equity securities, as well as the exercise of warrants, to finance our operations and internal growth. Additional funding has come through interest on investments, licensing revenue, government grants, the sale of product rights, and research and development tax credits. We have incurred significant losses since our inception. As of September 30, 2013, we had a deficit accumulated during the development stage of $285.9 million.

 

We believe that existing funds together with cash generated from operations and recent financing activities are sufficient to satisfy our planned working capital, capital expenditures and other financial commitments for at least the next twelve months. However, we do not currently have sufficient funds to complete development and commercialization of any of our drug candidates. Current business and capital market risks could have a detrimental effect on the availability of sources of funding and our ability to access them in the future which may delay or impede our progress of advancing our drugs currently in the clinical pipeline to approval by the FDA for commercialization.

 

Cash provided by (used in) operating, investing and financing activities

 

Cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2012 and 2013, is summarized as follows (all numbers in table are in thousands):

 

 

 

Nine months ended September 30,

 

 

 

2012

 

2013

 

Net cash used in operating activities

 

$

(9,584

)

$

(12,821

)

Net cash provided by investing activities

 

$

50

 

$

5,665

 

Net cash provided by financing activities

 

$

2,934

 

$

25,381

 

 

Cash flows generated from discontinued operations have been combined with the cash flows from continuing operations within each of the Operating, Investing and Financing activities sections.

 

Operating activities

 

Net cash used in operating activities increased by $3.2 million, from $9.6 million for the nine months ended September 30, 2012 to $12.8 million for the nine months ended September 30, 2013. The increase in net cash used in operating activities was primarily the result of an increase in spending on research and development and the timing of payment of professional fees, the expenses related to which were incurred during the year ended December 31, 2012 and paid during the nine months ended September 30, 2013.

 

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Investing activities