which are currently in Phase IIb and Phase Ib clinical trials, respectively. Future development of these drug candidates would necessarily involve more extensive clinical trials than have been conducted to date, and ultimately efforts to market and commercialize these drug candidates, involving substantial additional costs relative to Cyclacel’s historical levels of expenditure on these drug candidates. In addition, Cyclacel does not believe that historical costs associated with one drug candidate would be indicative of future costs for any other candidate in the same stage of development due to a number of factors, including the costs of manufacturing the drug candidate, the numbers of patients required to be enrolled in clinical trials in order to obtain relevant results and different development approaches and trial protocols that may be required depending upon the nature of any given drug candidate and the specific indications for which it is being developed.
Clinical development timelines and associated costs vary widely depending on how Cyclacel chooses to allocate its expenditures among its research and drug discovery programs. Cyclacel is currently focused on advancing seliciclib, sapacitabine and CYC116 drug candidates for cancer. Cyclacel anticipates, however, that it will make ongoing decisions on the continued development and funding of existing and future research and development projects in response to the scientific and clinical success of each drug candidate and technology, as well as an ongoing assessment of market potential.
Cyclacel cannot easily predict the costs it will incur in connection with obtaining regulatory approvals for its drug candidates. Completion dates and completion costs are difficult to estimate, varying widely for each of its drug candidates and technologies. Acquiring regulatory approvals requires significant expenditure. To the extent that Cyclacel fails to obtain regulatory approvals in a timely manner, its research and development costs may increase.
General and administrative expenses consist primarily of salaries and other related costs for employees in executive and operational functions. Other significant costs include costs related to accounting and legal services, particularly legal services associated with Cyclacel’s intellectual property, as well as facilities costs not otherwise included in research and development expenses.
Prior to the Xcyte transaction which was completed on March 27, 2006, Cyclacel granted a number of share options under Cyclacel’s Employees’ Share Option Scheme and Share Option Plan. Cyclacel records deferred share-based compensation as a component of shareholder’s (deficit)/equity. Deferred stock-based compensation for options granted to employees is the difference between the fair value of ordinary shares on the date such options were granted and their exercise price.
Cyclacel operated a number of share option plans, which provided the opportunity to all eligible individuals to participate in the potential growth and success of Cyclacel. In May 1997, Cyclacel adopted the Cyclacel Limited Share Option Plan (‘‘1997 Plan’’), which was approved by a shareholders’ resolution in May 1997. Under this plan, any person who was a director or employee of Cyclacel was eligible to be granted options to purchase ordinary shares in Cyclacel. In general, options granted under the 1997 Plan were not exercisable before the third anniversary of the date of grant and could not have been exercised later than the tenth anniversary of the date of grant. In February 2001, Cyclacel adopted the Cyclacel Limited 2000 Employees’ Share Option Scheme under the Enterprise Management Incentive Scheme (‘‘2000 Plan’’), which was approved by shareholders’ resolution in December 2000. Under this plan any person who was a director (other than a non executive director) or employee of Cyclacel was eligible to be granted options to purchase shares in Cyclacel.
Options granted under the 2000 Plan could not have been exercised more than ten years after the date of grant and, to the extent not exercised by that time, the option lapsed immediately. Options generally vested and became fully exercisable over a three year period. Shares could have been issued upon exercise of options under the terms of these employee share option plans up to a maximum of 12.5% of the issued share capital immediately following the closure of the series ‘‘D’’ funding round in November 2003.
On April 23, 2004, new options over 1,782,770 ordinary shares were granted under the above plans to employees at an exercise price of $2.66 (£1.50) per share, of which 415,508 would only be exercisable upon the achievement of certain corporate performance criteria. Subsequent to the issuance of the 415,508 options, Cyclacel concluded that the corporate performance criteria were inappropriate and these criteria were waived. Prior to the grant of 1,782,770 options, 598,692 existing options, with higher exercise prices, were surrendered by these employees. The new options became exercisable in equal tranches on the first, second and third anniversaries of the date of grant, the earliest option exercise date was April 23, 2005 and the expiration date April 23, 2014. The reasons for this event were that the surrendered options, many of which had already vested, had an exercise price significantly in excess of the current fair value of an ordinary share. Therefore the issue of these new options was undertaken to retain existing employees and enable them to share in Cyclacel’s future success.
The 598,692 options that were replaced and the 415,508 options that were only exercisable upon the achievement of certain corporate performance criteria were accounted for in accordance with the guidance on the modification of stock-based compensation plans. This resulted in a stock based compensation charge being accrued by Cyclacel over the period from April 23, 2004 to June 30, 2004.
As a consequence of the reorganization which occurred on June 30, 2004, the 1997 and 2000 share option plan rules were amended to provide that the options granted under the plans were, with effect from the reorganization, deemed to be exercisable over the ordinary shares in Cyclacel Group plc and not Cyclacel.
No further options were granted under the 1997 Plan or the 2000 Plan. Up to June 30, 2004, these awards were accounted for by Cyclacel in accordance with the provisions for variable compensatory plans as set out in Accounting Principles Board Option No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’). From July 1, 2004, these awards have been accounted for by Cyclacel Group plc in accordance with the provisions for variable compensatory plans as set out in APB 25. As the options are related to individuals employed by Cyclacel, the stock-based compensation charge related to these options has been allocated to Cyclacel from Cyclacel Group plc.
On July 1, 2004, Cyclacel Group plc adopted a new option plan, (the Cyclacel Group plc Discretionary Share Option Plan), a new SAYE plan, (the Cyclacel Group plc Restricted Share and Co Investment Plan) and a new restricted share and co investment plan, (the Cyclacel Group plc Restricted Share and Co Investment Plan). Cyclacel refers to these plans collectively as the ‘‘New Share Plans.’’ The New Share Plans replace the 1997 Plan and the 2000 Plan. One Cyclacel employee has received grants of options under the New Share Plans. The stock-based compensation charge related to these options has been allocated to Cyclacel from Cyclacel Group plc.
Cyclacel recorded amortization of deferred stock-based compensation for options granted to employees of $217,000, $279,000, and $(334,000) for the nine months ended December 31, 2003 and the years ended December 31, 2004 and 2005, respectively. Cyclacel has recorded $2,554,000 of deferred share-based compensation for the period from inception through December 31, 2005, of which $1,862,000 has been allocated to Cyclacel from Cyclacel Group plc and charged through the intercompany account.
On March 16, 2006, Xcyte stockholders approved the adoption of the 2006 Stock Option and Equity Award Plan (‘‘2006 Plan’’), under which Cyclacel, following the completion of the transaction with Xcyte on 27 March 2006, was able to make equity incentive grants to its officers, employees, directors and consultants. There were 1,615,795 shares of Cyclacel common stock reserved for issue under the 2006 Plan and as of the date of this report, a total of 1,312,341 options have been granted of which none have been exercised.
Interest and Other Income and Expense
Interest and other income and expense consist primarily of interest earned on cash, cash equivalents and short-term investments, net of interest expense and amortization of issuance costs of the preferred ‘‘C’’ shares.
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Research and Development Tax Credits
Cyclacel has elected to take advantage of U.K. corporation tax legislation, which allows companies to apply to convert tax losses into research and development tax credits, which are then repaid in cash to the applicant. Cyclacel has received $10.2 million of research and development tax credits in respect of the period April 1, 2002 to December 31, 2005. Cyclacel expected to receive a research and development tax credit of $1.9 million for the year ended December 31, 2005 and this was subsequently received.
Results of Operations
Comparison of years ended December 31, 2005 and December 31, 2004
Revenues
Revenues decreased $0.5 million, from $0.9 million for the year ended December, 2004 to $0.4 million for the year ended December 31, 2005. This decrease was primarily attributable to the completion of program work on which government grants were received.
Research and Development Expenses
Research and development expenses decreased $4.5 million from $20.3 million for the year ended December 31, 2004 to $15.8 million for the year ended December 31, 2005. This decrease was primarily a reflection of reduced costs on the completion of recruitment in Cyclacel’s seliciclib Phase IIa clinical trials and a deliberate strategy to reduce expenses and focus resources on oncology development programs. Of the $20.3 million of expenses in the year ended December 31, 2004, Cyclacel incurred $6.6 million, $2.1million, $2.3 million and $9.3 million in respect of drug candidate seliciclib, drug candidate sapacitabine, Aurora kinase program and research activities, respectively. Of the $15.8 million of expenses in the year ended December 31, 2005, Cyclacel incurred $4.8 million, $2.2 million, $5.4 million and $3.4 million in respect of drug candidate seliciclib, drug candidate sapacitabine, Aurora kinase program and research activities, respectively. Cyclacel’s stock-based compensation expense decreased from $0.3 million in the year ended December 31, 2004 to a credit of $0.3 million in the year ended December 31, 2005. This decrease was related to the recharge of stock based compensation to Cyclacel Group plc.
General and Administrative Expenses
General and administrative expenses increased $1.7 million from $3.6 million for the year ended December 31, 2004 to $5.3 million for the year ended December 31, 2005. This increase was primarily due to increased intellectual property maintenance fees and other related costs of $0.5 million and costs related to financing activities of $0.9 million. Cyclacel’s stock-based compensation expense decreased from a credit of $12,000 for the year ended December 31, 2004 to a credit of $39,000 in the year ended December 31, 2005. This decrease was related to the recharge of stock-based compensation to Cyclacel Group plc.
In the year ended December 31, 2004, Cyclacel incurred expenditure of $3.6 million related to activities associated with the aborted initial public offering in 2004.
Interest and Other Income and Expense
Interest and other income and expense decreased $0.5 million, from $1.3 million for the year ended December 31, 2004 to $0.8 million for the year ended December 31, 2005. This decrease was primarily attributable to lower average balances of cash, cash equivalents and investments in 2005.
Research and Development Tax Credits
Research and development tax credits decreased $0.6 million from $2.5 million for the year ended December 31, 2004 to $1.9 million for the year ended December 31, 2005. This decrease was a reflection of the lower research and development expenditure in the year ended December 31, 2005.
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Comparison of the year ended December 31, 2004 and nine months ended December 31, 2003
Revenues
Revenues increased $0.4 million from $0.5 million for the nine month period ended December 31, 2003 to $0.9 million for the year ended December 31, 2004. Collaboration revenue increased from $Nil in 2003 to $0.1 million in 2004 due to the collaboration with Corgentech, Inc. in 2004. Grant revenue from various government grant awards increased from $0.5 million in 2003 to $0.8 million in 2004 as Cyclacel continued to receive grant awards for projects initiated in 2003 and received $0.3 million on a new project commenced in 2004.
Research and Development Expenses
Research and development expenses increased $7.0 million from $13.3 million for the nine month period ended December 31, 2003 to $20.3 million for the year ended December 31, 2004. This rate of expenditure on our research and development programs has increased in 2004 compared to 2003 as Cyclacel has progressed its lead drug candidate, seliciclib, through Phase IIa, commenced Phase I clinical trials with sapacitabine having entered into collaboration with Sankyo in 2003, and increased its expenditure on the Aurora kinase (CYC116) program. Of the $13.3 million of expenses in the nine month period ended December 31, 2003, Cyclacel incurred $3.6 million, $0.6 million, $0.9 million, and $8.2 million in respect of drug candidate seliciclib, drug candidate sapacitabine, Aurora kinase (CYC116) program and research activities, respectively. Of the $20.3 million of expenses in the year ended December 31, 2004, Cyclacel incurred $6.6 million, $2.1 million, $2.3 million and $9.3 million in respect of drug candidate seliciclib, drug candidate sapacitabine, Aurora kinase program (CYC116) and research activities, respectively. Cyclacel’s stock-based compensation expense increased from an expense of $0.2 million in the nine-months ended December 31, 2003 to an expense of $0.3 million in the year ended December 31, 2004.
General and Administrative Expenses
General and administrative expenses increased $1.5 million from $2.1 million for the nine month period ended December 31, 2003 to $3.6 million for the year ended December 31, 2003. The increase in 2004 compared to 2003 was primarily due to an expansion of Cyclacel’s patent portfolio with the related costs of maintaining its intellectual property increased by $1.0 million, increased facility costs of $0.1 million and a $0.2 million increase in salary expense. Stock-based compensation expense was $Nil million in the nine months ended December 31, 2003 and the year ended December 31, 2004.
For the year ended December 31, 2004, Cyclacel incurred expenditure of $3.6 million related to activities associated with the aborted initial public offering in 2004.
Interest and other income and expense
Interest and other income and expense increased $2.9 million from a net expense of $1.6 million for the nine month period ended December 31, 2003 to a net income of $1.3 million for the year ended December 31, 2004. Interest income increased $1.0 million from 2003 to 2004 due to higher average balances of cash, cash equivalents and investments in 2004 following the series ‘‘D’’ financing which closed in January 2004 raising $36.9 million. Other expense decreased from $2.0 million in 2003 to $0.1 million. This decrease was due to the writing off of issuance costs of the preferred ‘‘C’’ shares of $1.9 million in 2003 with no charge in 2004 as all preferred ‘‘C’’ shares were canceled in 2003 as part of the series ‘‘D’’ financing.
Research and development tax credits
Research and development tax credits increased $1.0 million from $1.5 million for the nine-month period ended December 31, 2003 to $2.5 million for the year ended December 31, 2004. This increase was a reflection of the higher level of research and development expenditure in 2004 compared to 2003.
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Liquidity and Capital Resources
Since its inception, Cyclacel has not generated any significant product revenue and has relied primarily on the proceeds from sales of equity securities to finance its operations and internal growth. Additional funding has come through interest on investments, licensing revenue, government grants and research and development tax credits. Cyclacel has incurred significant losses since its inception. As of December 31, 2005, Cyclacel had an accumulated deficit of $109.0 million.
The following table summarizes our issuances of equity interests for cash, excluding executive and employee compensation, primarily preferred shares, through December 31, 2005:
| | | | | | | | | | | | | | | |
| Series | | | Date | | | Number of
shares | | | Gross Proceeds |
| | | | | | | | | | (in thousands) |
| A | | | May 1997 | | | | | 625,000 | | | | | $ | 4,099 | |
| B (First Closing) | | | May 1999 | | | | | 1,092,939 | | | | | $ | 8,109 | |
| B (Second Closing) | | | August 1999 | | | | | 840,336 | | | | | $ | 6,432 | |
| C | | | June 2001 | | | | | 4,554,251 | | | | | $ | 48,031 | |
| D (First Closing) | | | November 2003 | | | | | 4,088,427 | | | | | $ | 28,228 | |
| D (Second Closing) | | | January 2004 | | | | | 1,162,068 | | | | | $ | 8,646 | |
|
| |
| (1) | Includes 220,751 ordinary shares issued on conversion of bridging loans. |
| |
| (2) | Includes 835,794 preferred ‘‘C’’ shares issued on conversion of 8% secured convertible loan notes. |
Cyclacel has also received $3.3 million in government grants since its inception and $10.2 million in research and development tax credits. Cyclacel expects to elect to receive a research and development tax credit of $1.9 million for the year ended September 30, 2005.
At December 31, 2005, Cyclacel had cash and cash equivalents and short-term investments of $13.8 million as compared to $22.9 million at December 31, 2004. This higher balance at December 31, 2004 was primarily due to the receipt of net proceeds of $36.9 million related to the issue and sale of preferred D shares. Short-term investments decreased from $15.2 million at December 31, 2004 to $10.7 million at December 31, 2005. Cash and cash equivalents increased from $4.3 million at December 31, 2003 to $7.8 million at December 31, 2004 due to the funds received from the series D financing offset by additional operating losses and capital equipment purchases.
Net cash used in operating activities decreased $4.5 million from $19.6 million in the year ended December 31, 2004 to $15.1 million in the year ended December 31, 2005. This decrease was due to the reduction in operating losses and working capital movements. Net cash used in operating activities increased $5.2 million from $14.4 million in the nine months ended December 31, 2003 to $19.6 million in the year ended December 31, 2004. This increase was primarily due to additional operating losses.
Net cash provided by investing activities decreased $12.9 million from $15.6 million in the year ended December 31, 2004 to $2.7 million in the year ended December 31, 2005. Net cash used in investing activities increased $43.5 million from $(27.9) million in the nine months ended December 31, 2003 to $15.6 million in the year ended December 31, 2004. Cyclacel’s investment activities in these periods consisted primarily of the investment of proceeds from the sales of preferred shares.
Net cash provided by financing activities increased $1.4 million from $6.9 million in the year ended December 31, 2004 to $8.3 million in the year ended December 31, 2005. Net cash provided by financing activities decreased $19.8 million from $26.7 million in the nine months ended December 31, 2003 to $6.9 million in the year ended December 31, 2004. Cyclacel’s financing activities in these periods consisted primarily of the issuance of preferred shares.
On July 28, 2005, Cyclacel Group plc signed a convertible Loan Note Instrument constituting convertible unsecured loan notes. On July, 28, 2005, it signed as borrower, a Facility Agreement with
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Scottish Enterprise, as lender, whereby Scottish Enterprise subscribed for £5 million ($8.8 million) of the convertible loan notes. Upon the completion of the transaction, the convertible loan notes held by Scottish Enterprise converted into 1,231,527 preferred ‘‘D’’ shares in satisfaction of all amounts owed by Cyclacel Group plc under the convertible loan notes. The number of preferred ‘‘D’’ shares of Scottish Enterprise received was calculated by dividing the principal amount outstanding under the loan note by £4.06 or such lesser amounts as equaled the Conversion Rate applicable to the holders of Cyclacel Group plc Preferred ‘‘D’’ shares under the articles of association. Scottish Enterprise retained the ability they had under the Facility Agreement to receive a cash payment should the research operations in Scotland be significantly reduced. However, Cyclacel guaranteed the amount potentially due to Scottish Enterprise which was calculated as a maximum of £5 million less the market value of the shares held (or would have held in the event they dispose of any shares) by Scottish Enterprise at the time of any significant reduction in research facilities during the period ending on July 28, 2010. The intercompany balance between Cyclacel Group plc and Cyclacel was canceled on Cyclacel assuming the guarantee following completion of the transaction with Xcyte.
Private Placement
On April 26, 2006, the Company entered into a Stock and Purchase Agreement pursuant to which it sold to certain investors, for an aggregate purchase price of $45.3 million, 6,428,572 shares of its common stock and warrants to purchase up to 2,571,429 additional shares of its common stock. The purchase price for the common stock and the exercise price for the warrants was $7.00 per share. Investors in the financing paid an additional purchase price equal to $0.125 per warrant or an additional $0.05 for each share underlying the warrants. The warrants were not exercisable until six months after the closing and have an expiration date seven years after closing. No warrants have been exercised as of the date of this report.
Cyclacel was also a party to a long-term debt instrument, a government loan of $441,000 that bore interest at 5% per annum, which was wholly repaid in November 2005. As of December, 2005, Cyclacel had contractual obligations, relating to its facilities and equipment leases as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Payment Due by Period |
| Contractual obligations | | | Total | | | Less than
1 Year | | | 1-3 Years | | | 4-5 Years | | | After 5 Years |
| | | | | | | (in thousand) | | | | | | |
| Capital lease obligations | | | | $ | 329 | | | | | $ | 251 | | | | | $ | 78 | | | | | $ | — | | | | | $ | — | |
| Operating lease obligations | | | | $ | 4,041 | | | | | $ | 791 | | | | | $ | 1,531 | | | | | $ | 1,305 | | | | | $ | 414 | |
| Purchase obligations | | | | $ | 1,285 | | | | | $ | 1,285 | | | | | $ | — | | | | | $ | — | | | | | $ | — | |
| | | | | $ | 5,655 | | | | | $ | 2,327 | | | | | $ | 1,609 | | | | | $ | 1,305 | | | | | $ | 414 | |
|
Cyclacel also currently has a number of contractual arrangements with its partners under which milestone payments totaling $23.4 million would be payable subject to achievement of all the specific contractual milestones and its decision to continue with these projects. Under these contractual arrangements, Cyclacel makes annual payments that do not and will not exceed $0.1 million.
Disclosure about Market Risk
Cyclacel’s exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.K. interest rates, particularly because the majority of its investments are in short-term investments. The primary objective of Cyclacel’s investment activities is to preserve principal while at the same time maximizing the income it receives without significantly increasing risk. Cyclacel’s investment portfolio is subject to interest rate risk and will fall in value in the event market interest rates increase. Due to the short duration of its investment portfolio, Cyclacel believes an immediate 10% change in interest rates would not be material to its financial condition or results of operations. Cyclacel does not have any foreign currency or derivative financial instruments.
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Critical Accounting Policies
Cyclacel’s discussion and analysis of its financial condition and results of operations are based on its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Cyclacel to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Cyclacel reviews its estimates on an ongoing basis. Cyclacel bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While Cyclacel’s significant accounting policies are described in more detail in the notes to its financial statements included in this document, Cyclacel believes the judgments and estimates required by the following accounting policies to be critical in the preparation of its financial statements.
Revenue Recognition
Revenues are earned from collaborative agreements and amounts invoiced to customers in respect of goods supplied. Cyclacel recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial Statements, as amended by SAB Nos. 101A, 101B and 104. SAB No. 101 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed and determinable; and collectibility is reasonably assured. Determination of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management’s judgments regarding the fixed nature of the fee charged for research performed and milestones met, and the collectibility of those 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 expenses are incurred. 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.
Stock-based Compensation
For all financial statements prior to December 31, 2005, Cyclacel accounted for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (‘‘APB 25’’), ‘‘Accounting for Stock Issued to Employees ’’, Statement of Financial Accounting Standards No. 123 (‘‘SFAS No. 123’’), ‘‘ Accounting for Stock-Based Compensation ’’ and complied with the disclosure requirements of Statement of Financial Accounting Standards (‘‘SFAS’’) No. 148, ‘‘Accounting for Stock-Based Compensation Transition and Disclosure an Amendment of FASB Statement No. 123’’. Under APB 25, compensation expense is based on the difference, if any, on the date of grant, between the estimated fair value of its ordinary shares and the exercise price. SFAS No. 123 defines a ‘‘fair value’’ based method of accounting for an employee stock option or similar equity investment. On January 1, 2006, Cyclacel adopted SFAS 123R.
Cyclacel accounts for equity instruments issued to non employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (‘‘EITF’’) Issue No. 96-18, ‘‘Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods, or Services’’.
Recent Accounting Pronouncements
In March 2004, the EITF reached a consensus on EITF 03-1, ‘‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.’’ EITF 03-1 provides
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guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS 115 and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB Staff Position No. 115-1 and FAS 124-1, (The Meaning of Other-Than-Temporary Impairment and it as Application to Certain Investments.’’ The FSP addresses when an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 with earlier application permitted. For Cyclacel, the effective date was the first quarter of 2006. The adoption of this accounting principle did not have a significant impact on our financial position or results of operations.
In December 2004, the FASB issued SFAS 123R, Share-Based Payment (Revised 2004). SFAS 123R establishes standards for the accounting for transactions in which an entity receives employee services in exchange for the entity’s equity instruments or liabilities that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R eliminates the ability to account for share-based compensation using APB 25 and generally requires that such transactions be accounted for using a fair value method. The provisions of this statement are effective for financial statements issued for fiscal years beginning after June 15, 2005 and became effective for the Company beginning with the first quarter of 2006. We adopted SFAS 123R using the modified prospective method with no restatement and recorded the related stock compensation expense commencing January 1, 2006 with respect to the stock options outstanding at December 31, 2005.
The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS 123 to stock based employee compensation arrangements:
| | | | | | | | | | | | | | | | | | |
| | | | Nine months
ended
December 31,
2003 | | | Year ended
December 31,
2004 | | | Year ended
December 31,
2005 |
| | | | $000 | | | $000 | | | $000 |
| Net loss applicable to Ordinary shareholders, as reported | | | | | (19,402 | | | | | | (33,795 | | | | | | (29,924 | |
| Add: Stock-based employee compensation included in reported loss | | | | | 217 | | | | | | 279 | | | | | | (334 | |
| Less: Total stock-based employee compensation determined under fair value based method for all awards | | | | | (791 | | | | | | (2,979 | | | | | | (1,892 | |
| Adjusted net loss | | | | | (19,976 | | | | | | (36,495 | | | | | | (32,130 | |
| Loss per share | | | | $ | (2.32 | | | | | $ | (1.86 | | | | | $ | (1.62 | |
|
The fair value of each option granted is estimated on the date of grant using the Black Scholes option valuation model with the following weighted average assumptions:
| | | | | | | | | | | | | | | | | | |
| | | | Nine months
ended
December 31,
2003 | | | Year ended
December 31,
2004 | | | Year ended
December 31,
2005 |
| Risk free interest rate | | | | | — | | | | | | 4.3 | | | | | | 4.4 | |
| Expected life (in years) | | | | | — | | | | | | 3.5 | | | | | | 3.0 | |
| Volatility | | | | | — | | | | | | 90 | | | | | | 90 | |
| Dividend yield | | | | | — | | | | | | 0.00 | | | | | | 0.00 | |
|
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In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, ‘‘Accounting Changes and Error Corrections.’’ This statement replaces APB 20 cumulative effect accounting with retroactive restatement of comparative financial statements. It applies to all voluntary changes in accounting principle and defines ’’retrospective application’’ to differentiate it from restatements due to incorrect accounting. The provisions of this statement are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and has become effective for the Company in 2006. The adoption of this accounting principle would only have a significant impact on our financial position or results of operations if an error is made in future financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes’’, an interpretation of SFAS 109, ‘‘Accounting for Income Taxes’’ (‘‘FIN 48’’), FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the Company will adopt FIN 48 as of January 1, 2007. The impact of adopting FIN 48 on the Company’s financial position or results of operations, if any, has not yet been determined.
In September 2006, the FASB issued Statement of Financial Standards No. 157, ‘‘Fair Value Measurements’’ (‘‘SFAS 157’’). SFAS 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years and will be adopted by the Company as of January 1, 2008. SFAS 157 may impact our balance sheet and statement of operations in areas including the fair value measurements for derivative instruments. The Company is currently reviewing the provisions of SFAS 157 and has not yet determined the effect, if any, that adoption of SFAS 157 will have.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | | | | | |
| | | | | | | CYCLACEL PHARMACEUTICALS, INC. |
| | | | | | | |
| Dated: February 12, 2007 | | | By: | | | /s/ Paul McBarron |
| | | | | | | Name: Paul McBarron
Title: Executive Vice President, Finance &
Chief Operating Office |
|
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