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CYCC > SEC Filings for CYCC > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for CYCLACEL PHARMACEUTICALS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for CYCLACEL PHARMACEUTICALS, INC.


1-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

This report contains certain statements that may be deemed 'forward-looking statements' within the meaning of United States securities laws. 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. Certain factors that could cause results to differ materially from those projected or implied in the forward looking statements are set forth in this Annual Report on Form 10-K for the year ended December 31, 2012 under the caption "Item 1A - Risk factors".

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.

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

† Non-small cell lung cancer, or NSCLC.

We have other ongoing clinical programs with sapacitabine in non-small cell lung cancer, or NSCLC and sapacitabine in combination with seliciclib in patients who are BRCA-mutation carriers awaiting further data. Once data becomes available and is reviewed, we will determine the feasibility of pursuing further development and/or partnering these assets and also seliciclib in NSCLC and nasopharyngeal cancer, or NPC. 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, CDK inhibitor and AK 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 and seliciclib is the most advanced orally-available CDK 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. Research and development expenditures for the year ended December 31, 2012 decreased by $2.6 million, or 28%, from $9.2 million for the year ended December 31, 2011 to $6.6 million for the year ended December 31, 2012. Research and development expenditures for the year ended December 31, 2011 increased $2.8 million, or 44%, from $6.4 million for the year ended December 31, 2010 to $9.2 million for the year ended December 31, 2011.


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We have worldwide rights to commercialize sapacitabine and seliciclib and our business strategy is to enter into selective partnership arrangements with 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.

Our corporate headquarters is located in Berkeley Heights, New Jersey, with a research facility located in Dundee, Scotland.

From our inception in 1996 through December 31, 2012, 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 December 31, 2012, our accumulated deficit during the development stage was $270.3 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.

To date, we have not generated significant product revenue but have financed our operations and internal growth through private placements, registered direct financings, licensing revenue, collaborations, interest on investments, government grants and research and development tax credits. We have recognized revenues from inception through December 31, 2012, totaling $6.8 million, of which $3.1 million is derived from fees under collaborative agreements and $3.7 million of grant revenue from various United Kingdom government grant awards. We also recorded $3.6 million from product sales, although these sales ceased effective September 30, 2012. We have also recognized $19.5 million in research and development tax credits, which are reported as income tax benefits on the consolidated statements of operations, from the United Kingdom's tax authority, H.M. Revenue & Customs since inception.

Recent Events

Grant Award

In November 2012, we were awarded a grant of approximately $1.9 million from the UK Government's Biomedical Catalyst to complete an Investigational New Drug ("IND") directed preclinical development of CYC065, a novel orally available, second generation, CDK inhibitor.

Reverse Stock Split

On August 24, 2012, we effected a 1-for-7 reverse stock split of shares of common stock in order to increase the per share trading price of our shares of common stock to satisfy the $1.00 minimum bid requirement for continued listing on the NASDAQ Global Market. We received notification from NASDAQ that as of September 11, 2012, we evidenced a closing bid of our common stock price in excess of the $1.00 minimum requirement for at least 10 consecutive trading days. Accordingly, we have regained compliance with Listing Rule 5450(a)(1). All share and per share information presented gives effect to the reverse stock split, which occurred on August 24, 2012.

Termination and Settlement Agreement

On August 10, 2012, we entered into an agreement with Sinclair Pharmaceuticals Limited ("Sinclair") to terminate, effective September 30, 2012, the distribution agreements relating to the promotion and sale of Xclair®, Numoisyn® Lozenges and Numoisyn® Liquid. The agreement includes a minimum royalty arrangement based on future net revenues, under which Sinclair will pay us a minimum of approximately $1.0 million in quarterly installments over the next three years ending on September 30, 2015. The operating results associated with the promotion and sale of Xclair®, Numoisyn® Liquid and Numoisyn® Lozenges are classified within (loss) income from discontinued operations, net of tax in the consolidated statements of operations for all periods presented, and the associated assets and liabilities are classified within current and long-term assets of discontinued operations and current liabilities of discontinued operations, as appropriate, in the consolidated balance sheets for all applicable periods presented.


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Preferred Stock Dividend

On January 11, 2013, the Board of Directors declared a quarterly cash dividend in the amount of $0.15 per share on our 6% Convertible Exchangeable Preferred Stock ("Preferred Stock"). The cash dividend was paid on February 1, 2013 to the holders of record of the Preferred Stock as of the close business on January 22, 2013.

Preferred Stock Exchange

On January 2, February 1 and March 28, 2013, we settled three separate Securities Exchange Agreements with preferred stockholders, pursuant to which we issued an aggregate of 1,513,653 common shares to preferred stock holders in exchange of 792,460 shares of our 6% Exchangeable Convertible Preferred Stock.
The terms were determined by arms-length negotiations between the parties and the shares of common stock were issued in reliance on the exemption from registration contained in Section 3(a)(9) of the Securities Act of 1933, as amended (the "Securities Act"), for securities exchanged by the issuer and an existing security holder where no commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange. As we issued 1,465,480 common shares in excess of the number of shares the preferred stock was convertible into under the original conversion terms, we anticipate recording approximately $8.4 million of deemed dividends associated with these exchanges during the first quarter of 2013. As of March 28, 2013, a total of 420,862 shares of Preferred Stock remain outstanding.

Results of Operations

Years ended December 31, 2011 and 2012 compared to years ended December 31, 2010 and 2011, respectively.

Results of Continuing Operations



Revenues



The following table summarizes the components of our revenues for the years
ended December 31, 2010, 2011 and 2012 (all numbers in table are in thousands
except percentages):



                                Years ended                $ Differences          % Differences
                                                        2010 to      2011 to    2010 to    2011 to
                        2010       2011       2012       2011         2012       2011       2012

Collaboration and
research and
development revenue    $   100   $      -   $      -   $    (100 )  $       -      (100 )%       - %
Grant revenue               12          -         69         (12 )         69      (100 )%     100 %
Total revenue          $   112   $      -   $     69   $    (112 )  $      69      (100 )%     100 %

We recognized $0.1 million of collaboration and research and development revenue for the year ended December 31, 2010, derived from an agreement with a pharmaceutical company under which we provided one of our compounds for evaluation in the field of eye care. We had no collaboration and research and development revenue for the years ended December 31, 2011 and 2012.

Grant revenue is recognized as we incur and pay for qualifying costs and services under the applicable grant. Grant revenue is primarily derived from various United Kingdom government and European Union grant awards. For the years ended December 31, 2010 and 2012, we had grant revenue of $12,000 and $69,000, respectively. We did not recognize any grant revenue for the year ended December 31, 2011.


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The future

We expect to recognize approximately $1.4 million in grant revenue over the next twelve to eighteen months from the European Union and approximately $1.9 million in grant revenue over the next two years from the UK Government's Biomedical Catalyst.

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 years ended December 31, 2010, 2011 and 2012 (all numbers in table are in thousands except percentages):

                                Years ended              $ Differences        % Differences
                                                      2010 to    2011 to    2010 to    2011 to
                         2010      2011      2012       2011       2012      2011       2012

Sapacitabine            $ 5,222   $ 8,710   $ 6,275   $  3,488   $ (2,435 )      67 %      (28 )%
Other costs related
to research and
development programs,
management and
exploratory research      1,192       496       317       (696 )     (179 )     (58 )%     (36 )%
Total research and
development expenses    $ 6,414   $ 9,206   $ 6,592   $  2,792   $ (2,614 )      44 %      (28 )%

Research and development expenses represented 42%, 58% and 43% of our operating expenses for the years ended December 31, 2010, 2011 and 2012, respectively. Included in research and development expenses is stock-based compensation of $0.4 million, $0.2 million and approximately $71,000 for the years ended December 31, 2010, 2011 and 2012, respectively.


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Fiscal 2012 as compared to fiscal 2011

Research and development expenditures decreased by $2.6 million to $6.6 million for the year ended December 31, 2012 from $9.2 million for the year ended December 31, 2011. The decrease was primarily due to $1.6 million of contractual expenses recognized during the year ended December 31, 2011, resulting from an achievement of a milestone triggered by the opening of enrollment in the lead-in portion our SEAMLESS trial, pursuant to the Daiichi-Sankyo license under which we license certain patent rights for sapacitabine, a $0.4 million decrease in outsourced research costs as a result of an out of period reversal of accrued pre-clinical costs, a $0.5 million decrease in sapacitabine clinical supply costs, a $0.1 million decrease in stock compensation charges, and a $0.2 million decrease in employment costs partially offset by a $0.5 million increase in clinical trial costs.

Fiscal 2011 as compared to fiscal 2010

Research and development costs increased by 44%, or $2.8 million, from $6.4 million for the year ended December 31, 2010 to $9.2 million for the year ended December 31, 2011. The increase in costs of $2.8 million is primarily due to a $3.5 million increase in sapacitabine-related costs and a $0.7 million decrease in other research and development costs, respectively, as we continue to focus on the development of sapacitabine. The $3.5 million increase in sapacitabine expenditures was primarily due to $1.6 million of contractual expenses, resulting from an achievement of a milestone triggered by the opening of enrollment in our SEAMLESS trial, pursuant to the Daiichi Sankyo license under which we license certain patent rights for sapacitabine, a $0.9 million increase related to clinical trial supplies, and a $1.0 million increase in clinical trial expenses. Other research and development costs decreased $0.7 million to $0.5 million for the year ended December 31, 2011 from $1.2 million for the year ended December 31, 2010, as we have concentrated financial resources on the development of sapacitabine and reduced investment in other compounds.

The future

We expect to 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 to be similar compared to the year ended December 31, 2012, as we continue enrollment in the randomized portion of the SEAMLESS pivotal Phase 3 trial.

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 total general and administrative expenses for the years ended December 31, 2010, 2011 and 2012 (all numbers in table are in thousands except percentages):

                                     Years ended                $ Differences         % Differences
                                                                                     2010
                                                             2010 to     2011 to      to       2011 to
                              2010       2011       2012       2011       2012       2011       2012

General and
administrative expenses     $  8,833   $  6,542   $  8,580   $ (2,291 ) $   2,038       (26 )%      31 %

Total general and administrative expenses represented 58%, 42% and 57% of our operating expenses for the years ended December 31, 2010, 2011 and 2012, respectively.


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Fiscal 2012 as compared to fiscal 2011

Our general and administrative expenditure increased by approximately $2.0 million to $8.6 million for the year ended December 31, 2012, from $6.5 million for the year ended December 31, 2011. The increase in expenses was primarily attributable to a net increase in professional and consultancy costs of $2.2 million, an increase of employment-related costs of $0.2 million, and offset by a decrease in stock compensation costs of $0.4 million.

Fiscal 2011 as compared to fiscal 2010

General and administrative expenses decreased by 26%, or $2.3 million, to $6.5 million for the year ended December 31, 2011, from $8.8 million for the year ended December 31, 2010. The decrease of $2.3 million in expenses was primarily attributable to a decrease in professional and consultancy costs of $1.4 million, a decrease in stock based compensation of $0.7 million, a decrease in salaries of $0.1 million, and a decrease in rent of $0.4 million as a result of the expiration of our lease on a facility in Bothell, Washington in December 2010. These amounts were partially offset by a $0.2 million increase in patent-related costs, and a $0.1 million increase in Board of Directors expenses, mostly due to the addition of two new board members during the year ended December 31, 2011.

The future

We expect general and administrative expenditures for the year ended December 31, 2013 to be lower than our expenditures for the year ended December 31, 2012 as a result of an expected decrease in professional and consultancy costs.

Other income / (expense)

The following table summarizes the other income for years ended December 31, 2010, 2011 and 2012 (all numbers in table are in thousands except percentages):

                                 Years ended               $ Differences          % Differences
                                                        2010 to      2011 to    2010 to   2011 to
                          2010      2011      2012       2011         2012       2011      2012
Non-cash consideration
associated with stock
purchase agreement       $     -   $     -   $  (423 ) $       -    $    (423 )       - %       - %
Change in valuation of
Economic Rights                -         -       (23 )         -          (23 )       - %       - %
Change in valuation of
liabilities measured
at fair value               (338 )     609        51         947         (558 )     280 %     (92 )%
Foreign Exchange
(losses) / gains             (68 )     (74 )     292          (6 )        366         9 %    (495 )%
Interest income               37        45        22           8          (23 )      22 %     (51 )%
Interest expense             (43 )       -         -          43            -       100 %       - %
Other income                   -         -        77           -           77         - %       - %
Total other (expense),
income net               $  (412 ) $   580   $    (4 ) $     992    $    (584 )     241 %    (101 )%


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Fiscal 2012 as compared to fiscal 2011

Total other income and expense, net, decreased by approximately $0.6 million, from income of approximately $0.6 million for year ended December 31, 2011, to an expense of approximately $4,000 for the year ended December 31, 2012. The decrease was primarily because of a $0.6 million decrease in change in valuation of liabilities measured at fair value and a $0.4 expense related to the stock purchase agreement, partially offset by a $0.4 million increase in foreign exchange gains (losses), mostly due to the increase in exchange rate of the British Pound Sterling relative to the U.S. Dollar.

Non-cash consideration associated with stock purchase agreement

The $0.4 million represents the portion of the fair value of the 74,548 shares of common stock issued for no consideration in the connection with the Aspire transaction that have been allocated to the right to sell additional shares in the future.

Change in valuation of Economic Rights

This relates to the sale of economic rights in connection with our ongoing litigation with Celgene Corporation pursuant to the purchase agreement completed with certain investors in March 2012. These collective rights are classified as liabilities and are marked to market each reporting period. For the year ended December 31, 2012, we recognized a loss of approximately $23,000 due to the change in the value of economic rights from the transaction date of March 22, 2012 to December 31, 2012.

Change in valuation of liabilities measured at fair value

The change in valuation of other liabilities measured at fair value relates to the issue of 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 year ended December 31, 2011 and 2012, the change in the valuation of liabilities measured at fair value was a gain of $0.6 million and a gain of approximately $51,000, respectively.

Foreign Exchange gains / (losses)

Foreign exchange gains (losses) increased by $0.4 million to a gain of $0.3 million for the year ended December 31, 2012 compared to a loss of approximately $0.1 million for the year ended December 31, 2011. Foreign exchange gains (losses) are reported in the consolidated statement of operations as a separate line item within other income (expense).

The intercompany loans outstanding are not expected to be repaid in the foreseeable future and the nature of the funding advanced is of a long-term investment nature. Therefore all unrealized foreign exchange gains or losses arising on the intercompany loans are recognized in other comprehensive income until repayment of the intercompany loan becomes foreseeable. Unfavorable unrealized foreign exchange movements related to intercompany loans recorded in other comprehensive income totaled $4.6 million gain and $0.6 million loss for the years ended December 31, 2012 and December 31, 2011, respectively.


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Interest Income

Interest income decreased by approximately $23,000 to approximately $22,000 for the year ended December 31, 2012 compared to approximately $45,000 for the year ended December 31, 2011. The lower interest income was due to a decrease in cash and cash equivalents in 2012 as compared to 2011.

Other Income

We recognized $62,000 in other income from the sale of laboratory equipment during the year ended December 31, 2012. We did not recognize any such income during the year ended December 31, 2011.

Fiscal 2011 as compared to fiscal 2010

Total other income (expense), net, increased by $1.0 million, from an expense of $0.4 million for the year ended December 31, 2010, to income of $0.6 million for the year ended December 31, 2011, mainly due the $1.0 million increase in the change in the valuation of the warrant liability, mostly due to the decrease in our common share price from $10.29 at December 31, 2010 to $4.13 at December 31, 2011.

Change in valuation of liabilities measured at fair value

The change in valuation of other liabilities measured at fair value relates to the issue of 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 year ended December 31, 2011, we recognized income from the change in the valuation of liabilities measured at fair value of $0.6 million and for the year ended December 31, 2010, we recognized an expense of $0.3 million.

Foreign Exchange gain/(loss)

Foreign exchange gains/losses not related to intercompany loans are recorded in income (expense). Foreign exchange gain/(loss) was a $74,000 expense for the year ended December 31, 2011, compared to a $68,000 expense for the year ended December 31, 2010.

The intercompany loans outstanding are not expected to be repaid in the foreseeable future and the nature of the funding advanced is of a long-term investment nature. Therefore all unrealized foreign exchange gains or losses arising on the intercompany loans are recognized in other comprehensive income until repayment of the intercompany loan becomes foreseeable. Unfavorable unrealized foreign exchange movements related to intercompany loans recorded in . . .

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