Cyclacel Pharmaceuticals, Inc. - Quarter Report: 2013 March (Form 10-Q)

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 March 31, 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)

 

 

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.

 

 

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 May 13, 2013 there were 10,881,780 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	26
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
	Item 4.	Controls and Procedures	37
Part II.	Other Information
	Item 1.	Legal Proceedings	38
	Item 1A.	Risk Factors	38
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
	Item 3.	Defaults upon Senior Securities	59
	Item 4.	Mine Safety Disclosures	59
	Item 5.	Other Information	59
	Item 6.	Exhibits	59
SIGNATURE PAGE			60

 

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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,			March 31,
		2012			2013
					(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	16,412		$	14,139
Prepaid expenses and other current assets		1,599			2,056
Current assets of discontinued operations		861			835
Total current assets		18,872			17,030
Property, plant and equipment (net)		129			184
Long-term assets of discontinued operations		353			272
Total assets		$	19,354		$	17,486
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,259		$	2,825
Accrued and other current liabilities		5,601			3,534
Economic Rights measured at fair value		1,120			550
Other liabilities measured at fair value		20			20
Current liabilities of discontinued operations		335			323
Total current liabilities		9,335			7,252
Total liabilities		9,335			7,252
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized at December 31, 2012 and March 31, 2013; 1,213,142 and 420,682 shares issued and outstanding at December 31, 2012 and March 31, 2013, respectively. Aggregate preference in liquidation of $14,436,390 and $5,006,116 at December 31, 2012 and March 31, 2013, respectively		1			—
Common stock, $0.001 par value; 100,000,000 shares authorized at December 31, 2012 and March 31, 2013; 8,686,484 and 10,881,780 shares issued and outstanding at December 31, 2012 and March 31, 2013, respectively		9			11
Additional paid-in capital		280,211			292,114
Accumulated other comprehensive income (loss)		48			(193		)
Deficit accumulated during the development stage		(270,250		)	(281,698		)
Total stockholders’ equity		10,019			10,234
Total liabilities and stockholders’ equity		$	19,354		$	17,486

 

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

 

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CYCLACEL PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In $000s, except share and per share amounts)
(Unaudited)

 

		Three Months Ended March 31,						Period from August 13, 1996 (inception) to March 31,
		2012			2013			2013
Revenues:
Collaboration and research and development revenue		$	—		$	—		$	3,100
Grant revenue		—			212			3,929
Total revenues		—			212			7,029
Operating expenses:
Research and development		1,347			1,580			193,971
General and administrative		1,768			2,683			92,094
Goodwill and intangibles impairment		—			—			2,747
Other restructuring costs		—			—			2,634
Total operating expenses		3,115			4,263			291,446
Operating loss		(3,115		)	(4,051		)	(284,417		)
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		(56		)	570			547
Change in valuation of liabilities measured at fair value		42			—			6,378
Foreign exchange losses		114			120			(3,885		)
Interest income		6			1			13,748
Interest expense		—			—			(4,567		)
Other income (expense)		47			4			81
Total other (expense) income, net		153			695			6,677
Loss from continuing operations before taxes		(2,962		)	(3,356		)	(277,740		)
Income tax benefit		168			258			20,053
Net loss from continuing operations		(2,794		)	(3,098		)	(257,687		)
Discontinued operations:
(Loss) income from discontinued operations, net of tax of $0 and $10 for the three months ended March 31, 2012 and 2013, respectively		(161		)	16			(12,130		)
Net loss		(2,955		)	(3,082		)	(269,817		)
Dividend on preferred ordinary shares		—			—			(38,123		)
Deemed dividend on convertible exchangeable preferred shares		—			(8,366		)	(11,881		)
Dividend on convertible exchangeable preferred shares		(182		)	(122		)	(4,507		)
Net loss applicable to common shareholders		(3,137		)	(11,570		)	(324,328		)
Net loss per share, continuing operations — basic and diluted		$	(0.38	)	$	(1.18	)
Net loss per share, discontinued operations — basic and diluted		$	(0.02	)	$	—
Net loss per share — basic and diluted		$	(0.40	)	$	(1.18	)
Weighted average common shares outstanding		7,823,089			9,790,474

 

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

 

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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 March 31,						Period from August 13, 1996 (inception) to December 31,
		2012			2013			2013
Comprehensive loss		$	(2,947	)	$	(3,323	)	$	(270,010	)

 

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

 

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

 

		Three Months Ended March 31,				Period from August 13, 1996 (inception) to March 31,
		2012		2013		2013
		$000		$000		$000
Operating activities:
Net loss		(2,955	)	(3,082	)	(269,817	)
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		14		(570	)	(6,925	)
Non-cash consideration associated with stock purchase agreement		—		—		423
Depreciation		15		26		12,641
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
Shares issued for IP rights		—		—		446
Loss (gain) on disposal of property, plant and equipment		(47	)	—		38
Goodwill and intangibles impairment		—		—		7,934
Stock-based compensation		102		72		19,475
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	)
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(126	)	(482	)	(779	)
Accounts payable and other current liabilities		(807	)	(1,332	)	(4,877	)
Net cash used in operating activities		(3,771	)	(5,368	)	(230,530	)
Investing activities:
Purchase of ALIGN		—		—		(3,763	)
Purchase of property, plant and equipment		(9	)	(92	)	(8,941	)
Minimum royalty payments received from termination of ALIGN license agreement		—		132		132
Proceeds from sale of property, plant and equipment		24		—		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		15		40		(6,275	)

 

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

 

		Three Months Ended March 31,				Period from August 13, 1996 (inception) to March 31,
		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		2,911		3,414		98,966
Proceeds from the exercise of stock options and warrants, net of issuance costs		34		—		267
Payment of preferred stock dividend		—		(129	)	(2,027	)
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		2,945		3,285		250,719
Effect of exchange rate changes on cash and cash equivalents		2		(230	)	225
Net increase (decrease) in cash and cash equivalents		(809	)	(2,273	)	14,139
Cash and cash equivalents, beginning of period		24,449		16,412		—
Cash and cash equivalents, end of period		23,640		14,139		14,139
Supplemental cash flow information:
Cash received during the period for:
Interest		5		1		11,758
Taxes		—		—		18,772
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 common shares in connection with license agreements		—		—		592
Issuance of Ordinary shares on conversion of bridging loan		—		—		1,638
Issuance of Preferred Ordinary ‘C’ shares on conversion of secured convertible loan notes and accrued interest		—		—		8,893
Issuance of Ordinary shares in lieu of cash bonus		—		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.

 

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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 Phase1 study in combination with seliciclib, our second clinical candidate, in patients with solid tumors. The U.S. Food and Drug Administration, or 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 ongoing clinical programs with seliciclib, an oral, highly selective inhibitor of CDK enzymes, in NSCLC and nasopharyngeal cancer (“NPC”) and once data becomes available and is reviewed, the Company will determine the feasibility of pursuing further development and/or partnering these assets.

 

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 $1.9 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, including its polo-like kinase, or PLK, inhibitor program, the Company discovered CYC140, a potent and selective, orally-available, small molecule inhibitor of PLK1, a kinase active during cell division, targeting the mitotic phase of the 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 is not sufficient to complete the development and commercialization of any of its product candidates.

 

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Basis of Presentation

 

The condensed consolidated balance sheet as of March 31, 2013, the condensed consolidated statements of operations, comprehensive loss, and cash flows for the three months ended March 31, 2013 and 2012 and the period from August 13, 1996 (inception) to March 31, 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 March 31, 2013, and the results of operations, comprehensive loss and cash flows for the three months ended March 31, 2013 and 2012, have been made. The interim results for the three months ended March 31, 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.

 

Recent Developments

 

Preferred Stock Dividend

 

On January 11, 2013, the Company’s Board of Directors (the “Board”) declared a quarterly cash dividend in the amount of $0.15 per share on the Company’s 6% Convertible Exchangeable Preferred Stock (“Preferred Stock”) with respect to the fourth quarter of 2012. The Company paid the dividend on February 1, 2013 to holders of record of the Preferred Stock as of the close of business on January 22, 2013.

 

Preferred Exchanges

 

During the first quarter of 2013, the Company settled three separate Securities Exchange Agreements with certain stockholders pursuant to which the Company agreed to issue an aggregate of 1,513,653 shares of its common stock to the preferred stockholders in exchange for their delivery to the Company an aggregate of 792,460 shares of the Company’s Preferred Stock. The Company issued 1,465,480 shares of common stock in excess of the number of shares the Preferred Stock was convertible into under the original conversion terms. Accordingly, deemed dividends in the amount of approximately $8.4 million were recorded during the first quarter of 2013. As a result of these transactions, a total of 420,862 shares of Preferred Stock remain outstanding as of March 31, 2013.

 

Stock Purchase Agreement

 

During the first quarter of 2013, the Company sold 650,000 shares of its common stock to Aspire Capital Fund, LLC (“Aspire”) under the Common Stock Purchase Agreement in consideration for aggregate proceeds of approximately $3.4 million.

 

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 U.S. 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, such as the Economic Rights 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.

 

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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, composed of $5.9 million of cash and $8.2 million of cash equivalents, was $14.1 million at March 31, 2013. Cash and cash equivalents, composed 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. Economic Rights, 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.

 

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.

 

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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.

 

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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 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.

 

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 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 in the accounting period for research and development tax credits, which will be claimed from H. M. Revenue & Customs, the United Kingdom’s taxation and customs authority, in respect of qualifying research and development costs incurred in the same accounting period.

 

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 11 - “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 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.

 

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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 Loss 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 were determined by dividing net loss applicable to common stockholders by the weighted average number of common shares 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.

 

		Three Months Ended March 31,
		2012		2013
Stock options		491,240		463,023
Restricted Stock and Restricted Stock Units		49,255		124,474
Convertible preferred stock		73,747		25,573
Contingently issuable shares and common stock warrants associated with Economic Rights		419,007		220,595
Common stock warrants		1,973,427		1,973,427
Total shares excluded from calculation		3,006,676		2,807,092

 

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 U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  For other reclassification items (that are not required under U.S. 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 U.S. 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 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 U.S. 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.

 

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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:

 

·                  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.

 

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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 March 31, 2013 (in $000s):

 

		Level 1		Level 2		Level 3		Total
ASSETS
Cash equivalents		3,876		4,299		—		8,175
Total assets		3,876		4,299		—		8,175
LIABILITIES
Financial instrument associated with stock purchase agreement		—		—		—		—
Economic rights		—		550		—		550
Other liabilities measured at fair value:
Warrants liability		—		—		—		—
Scottish Enterprise agreement		—		—		20		20
Other liabilities measured at fair value		—		—		20		20
Total liabilities		—		550		20		570

 

The following table reconciles the beginning and ending balances of Level 3 inputs for the three months ended March 31, 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 March 31, 2013		20

 

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.

 

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During the first quarter of 2013, the Company sold 650,000 shares of its common stock to Aspire under the Common Stock Purchase Agreement in consideration for aggregate proceeds of $3.4 million.

 

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 was deemed to have had minimal fair value at inception and such value is not expected to change 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.

 

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 common shares or warrants (collectively, the “Economic Rights”). The Economic Rights are 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 both parties have filed a joint stipulation and order for dismissal requesting the Court to enter an order dismissing the litigation. As a result, the holders of the economic rights were paid approximately $0.6 million in April 2013.  Accordingly, the Company recorded the Economic Rights liability at $0.6 million as of March 31, 2013.

 

The fair value of this liability was approximately $1.1 million as of December 31, 2012 and $0.6 million as of March 31, 2013.  The $0.5 million decrease in the fair value of the Economic Rights during the three months ended March 31, 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.  At March 31, 2013, the Company had sufficient information available to estimate the fair value of the economic rights based on the actual amount owed under the Economic Rights agreement, which was 10% of the $5.5 million one-time payment from Celgene.

 

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 March 31, 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 March 31, 2013 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 $42,000 for the three months ended March 31, 2012. There was no change in the value of warrants for the three months ended March 31, 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 $6.1 million at March 31, 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 $5.7 million) at December 31, 2012 and March 31, 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 March 31, 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 March 31, 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.

 

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4.    PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

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

 

		December 31,		March 31,
		2012		2013
Research and development tax credit receivable		1,033		1,215
Prepayments		358		245
Grant receivable		—		203
Sales tax receivable		45		233
Deposits		153		153
Other current assets		10		7
		1,599		2,056

 

5.    ACCRUED AND OTHER CURRENT LIABILITIES

 

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

 

		December 31,		March 31,
		2012		2013
Accrued research and development		3,623		2,777
Accrued legal and professional fees		1,118		396
Other current liabilities		860		361
		5,601		3,534

 

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.

 

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Stock based compensation has been reported within expense line items on the consolidated statement of operations for the three months ended March 31, 2012 and 2013 as shown in the following table (in $000s):

 

		For the three months ended March 31,
		2012		2013
General and administrative		77		57
Research and development		17		15
Discontinued operations		8		—
Stock-based compensation costs before income taxes		102		72

 

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 no options granted during the three months ended March 31, 2012 and 2013.

 

During the three months ended March 31, 2012, 77,062 options were exercised for proceeds of approximately $34,000. There were no stock options exercised during the three months ended March 31, 2013.  The Company does not expect to be able to benefit from the deduction for stock option exercises that may occur during the year ending December 31, 2013 because the Company has tax loss carryforwards from prior periods that would be expected to offset any potential taxable income for the year ended December 31, 2013.

 

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
Options outstanding at December 31, 2012		463,023		$	26.61		5.58		$	347
Granted		—		$	—
Exercised		—		$	—
Cancelled/forfeited		—		$	—
Options outstanding at March 31, 2013		463,023		$	26.61		5.33		292
Unvested at March 31, 2013		62,024		$	8.66		8.22		52
Vested and exercisable at March 31, 2013		400,999		$	29.39		4.88		240

 

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.

 

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The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. During the three months ended March 31, 2012 the Company recognized an expense of approximately $1,000 as a result of revised forfeiture rates. There was no change in forfeiture rates during the three months ended March 31, 2013.

 

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 three months ended March 31, 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 March 31, 2013 and, as a result, did not record any expense related to these awards for the three months ended March 31, 2013.

 

Summarized information for restricted stock unit activity for the three months ended March 31, 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
Non-vested at March 31, 2013		124,474		$	5.60

 

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 six months’ notice, or twelve months, if after a launch of a sapacitabine-based product, or by either party for material default.

 

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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, Celgene has 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.

 

8.   STOCKHOLDERS’ EQUITY

 

Preferred stock

 

As of March 31, 2013, there were 420,682 shares of 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 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 25,573 shares of common stock for issuance upon conversion of the remaining shares of Preferred Stock outstanding at March 31, 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.

 

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.

 

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Conversion of Convertible Preferred Stock

 

During the three months ended March 31, 2013, the Company converted an aggregate of 792,460 shares of Preferred Stock into an aggregate of 1,513,653 shares of the Company’s common stock. There were no conversions of the Company’s Preferred Stock into shares of common stock during the three months ended March 31, 2012. Since the reverse merger in 2006, holders have exchanged 1,626,131 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:

 

		Three months ended March 31, 2013
Preferred shares exchanged		792,460
Common shares issued:
At stated conversion terms		48,174
Incremental shares issued under the exchange transaction		1,465,479
Total common shares issued		1,513,653

 

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 $8.4 million for the three months ended March 31, 2013.

 

Common Stock

 

During the three months ended March 31, 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.

 

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 has 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 three months ended March 31, 2013, the Company sold 650,000 shares of its common stock to Aspire under the Purchase Agreement in consideration for aggregate proceeds of $3.4 million.

 

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.

 

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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 March 31, 2013:

 

Issued in Connection With		Expiration Date		Common Shares Issuable		Weighted Average Exercise Price
April 2006 stock issuance		2013		367,347		$	49.00
February 2007 stock issuance		2014		151,773		$	59.08
December 2007 Committed Equity Financing Facility		2013		14,285		$	9.80
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				1,973,427		$	22.96

 

There were no exercises of warrants during the three months ended March 31, 2012 and 2013.

 

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 March 31,  2012			Three months ended March 31,  2013			Period from August 13, 1996 (inception) to March 31, 2013
Product revenue		$	161		$	—		$	3,604
Cost of goods sold		(94		)	—			(2,045		)
Selling, general and administrative		(228		)	—			(9,295		)
Goodwill and intangible impairment		—			—			(5,187		)
Interest income		—			26			58
Interest expense		—			—			(110		)
Gain on termination of license agreement		—			—			1,192
(Loss) income from discontinued operations		(161		)	26			(11,783		)
Income tax expense		—			(10		)	(347		)
(Loss) income from discontinued operations, net of tax		$	(161	)	$	16		$	(12,130	)

 

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Table of Contents

 

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			March 31, 2013
Current assets of discontinued operations:
Short term portion of minimum royalty arrangement receivable, net		$	536		$	512
Returns indemnification receivable		325			323
Total current assets of discontinued operations		861			835
Long-term assets of discontinued operations:
Long-term portion of minimum royalty arrangement receivable, net		353			272
Total assets of discontinued operations		1,214			1,107
Current liabilities of discontinued operations:
Accounts payable		$	10		$	—
Returns provision		325			323
Total current liabilities of discontinued operations		$	335		$	323

 

The $0.8 million minimum royalty arrangement receivable outstanding as of March 31, 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 March 31, 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.

 

10.   SUBSEQUENT EVENTS

 

Preferred Dividend

 

On April 5, 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 May 1, 2013 to the holders of record of the Preferred Stock as of the close of business on April 19, 2013.

 

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, Celgene has 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 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.

 

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