PROSPECTUS SUPPLEMENT NO. 2 (TO PROSPECTUS DATED JUNE 22, 2010)		Filed pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 333-140034

3,172,168 Shares of Common Stock
Issuable Upon Exercise of Outstanding Warrants
Issued in Registered Direct Offerings

CYCLACEL PHARMACEUTICALS, INC.

Common Stock, $0.001 Par Value
Issuable Upon Exercise of Outstanding Warrants

This Prospectus Supplement No. 2 supplements and amends the prospectus dated June 22, 2010, as supplemented and amended by Prospectus Supplement No. 1 filed on September 14, 2010 (together, the “Prospectus”), relating to the registration of 3,172,168 shares of common stock, par value $0.001 par value, which we may issue upon exercise of warrants to purchase common stock we issued as part of “registered direct” offerings, as follows: (i) warrants to purchase up to 1,062,412 shares of common stock at an exercise price of $8.44 per share we issued on February 16, 2007, such warrants expiring on February 16, 2014. We refer to these warrants as the February 2007 Warrants; (ii) warrants to purchase up to 692,256 shares of common stock at an exercise price of $1.00 per share we issued on July 29, 2009, such warrants expiring on July 29, 2014. We refer to these warrants as the July 2009 warrants; (iii) warrants to purchase up to 712,500 shares of common stock at an exercise price of $3.26 per share we issued on January 13, 2010, such warrants expiring on January 13, 2015. We refer to these warrants as the January 13, 2010 Warrants; and (iv) warrants to purchase up to 705,000 shares of common stock at an exercise price of $2.85 per share we issued on January 25, 2010, such warrants expiring on January 25, 2015. We refer to these warrants as the January 25, 2010 Warrants, and collectively with the February 2007 Warrants, July 2009 Warrants and the January 13, 2010 Warrants, the “outstanding registered direct warrants.”

To the extent any holder of our outstanding registered direct warrants determines to exercise its warrants, we will receive the payment of the exercise price in connection with such exercise. We will not receive any proceeds from the sale of the common stock by the holders of the outstanding registered direct warrants.

This prospectus supplement should be read in conjunction with the Prospectus, which is to be delivered with this prospectus supplement. This prospectus supplement is not complete without, and may not be delivered or utilized except in connection with, the Prospectus.

On November 12, 2010, we filed our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010. That Form 10-Q, without exhibits, is attached hereto.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10 of the Prospectus, as well as the section entitled “Risk Factors” included in our recent quarterly and annual reports filed with the Securities and Exchange Commission.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the Prospectus to which it relates are truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is November 16, 2010.

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number 0-50626

CYCLACEL PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware		91-1707622
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)
200 Connell Drive, Suite 1500
Berkeley Heights, New Jersey		07922
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (908) 517-7330

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ 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 o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

As of November 11, 2010 there were 46,560,844 shares of the registrant’s common stock outstanding.

 

 

CYCLACEL PHARMACEUTICALS, INC.

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4T. Controls and Procedures			36
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. (Removed and Reserved)			59
Item 5. Other Information			59
Item 6. Exhibits			59
SIGNATURE PAGE			60

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements.

CYCLACEL PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In $000s, except share amounts)

		December 31,				September 30,
		2009				2010
						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents			11,493				18,482
Inventory			145				144
Prepaid expenses and other current assets			1,731				1,057
Total current assets			13,369				19,683
Property, plant and equipment (net)			901				512
Deposits and other assets			196				196
Total assets			14,466				20,391
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			1,709				1,340
Accrued liabilities and other current liabilities			6,709				5,641
Warrant liability			342				785
Other accrued restructuring charges			1,062				199
Total current liabilities			9,822				7,965
Total liabilities			9,822				7,965
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized at December 31, 2009 and September 30, 2010; 2,046,813 and 1,213,142 shares issued and outstanding at December 31, 2009 and September 30, 2010, respectively. Aggregate preference in liquidation of $21,696,218 and $13,344,562 at December 31, 2009 and September 30, 2010, respectively			2				2
Common stock, $0.001 par value; 100,000,000 shares authorized at December 31, 2009 and September 30, 2010; 25,743,363 and 38,235,991 shares issued and outstanding at December 31, 2009 and September 30, 2010, respectively			26				37
Additional paid-in capital			226,881				250,466
Accumulated other comprehensive income			20				(30	)
Deficit accumulated during the development stage			(222,285	)			(238,049	)
Total stockholders’ equity			4,644				12,426
Total liabilities and stockholders’ equity			14,466				20,391

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

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

																		Period from
																		August 13,
																		1996
		Three Months Ended								Nine Months Ended								(inception) to
		September 30,								September 30,								September 30,
		2009				2010				2009				2010				2010
		(Restated)								(Restated)								(Restated)
Revenues:
Collaboration and research and development revenue			—				—				—				100				3,100
Product revenue			223				159				688				432				2,180
Grant revenue			7				—				36				16				3,652
Total revenue			230				159				724				548				8,932
Operating expenses:
Cost of goods sold			163				76				472				310				1,284
Research and development			1,394				1,469				7,174				4,968				175,145
Selling, general and administrative			2,188				2,612				6,703				8,103				79,949
Goodwill and intangibles impairment			—				—				—				—				7,934
Restructuring expenses			—				—				366				—				2,634
Total operating expenses			3,745				4,157				14,715				13,381				266,946
Operating loss			(3,515	)			(3,998	)			(13,991	)			(12,833	)			(258,014	)
Other income (expense):
Costs associated with aborted 2004 IPO			—				—				—				—				(3,550	)
Payment under guarantee			—				—				(1,652	)			—				(1,652	)
Change in valuation of derivative			—				—				—				—				(308	)
Change in valuation of warrants			101				73				(195	)			(443	)			5,921
Foreign exchange gains/(losses)			119				(25	)			(129	)			(63	)			(4,252	)
Interest income			7				7				94				24				13,667
Interest expense			(41	)			(7	)			(156	)			(40	)			(4,674	)
Total other income (expense)			186				48				(2,038	)			(522	)			5,152
Loss before taxes			(3,329	)			(3,950	)			(16,029	)			(13,355	)			(252,862	)
Income tax benefit			205				143				796				506				17,728
Net loss			(3,124	)			(3,807	)			(15,233	)			(12,849	)			(235,134	)
Dividends on preferred ordinary shares			—				—				—				—				(38,123	)
Deemed dividend on convertible exchangeable preferred shares			—				—				—				(2,915	)			(2,915	)
Dividend on convertible exchangeable preferred shares			(307	)			(182	)			(921	)			(585	)			(3,347	)
Net loss applicable to common shareholders			(3,431	)			(3,989	)			(16,154	)			(16,349	)			(279,519	)
Net loss per share – Basic and diluted		$	(0.15	)		$	(0.11	)		$	(0.76	)		$	(0.47	)
Weighted average common shares outstanding			23,172,259				37,030,436				21,356,206				35,125,522

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

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

										Period from
										August 13, 1996
		Nine Months Ended								(inception) to
		September 30,								September 30,
		2009				2010				2010
		(Restated)								(Restated)
Cash flows from operating activities:
Net loss			(15,233	)			(12,849	)			(235,134	)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of interest on notes payable, net of amortization of debt premium			2				—				100
Amortization of investment premiums, net			20				—				(2,297	)
Change in valuation of derivative			—				—				308
Change in valuation of warrants			195				443				(5,965	)
Warrant re-pricing			—				—				44
Depreciation and amortization			501				351				12,208
Amortization of intangible assets			—				—				886
Fixed asset impairment			—				—				221
Goodwill and intangibles impairment			151				—				7,934
Unrealized foreign exchange loss			—				—				7,747
Deferred revenue			—				—				(98	)
Compensation for warrants issued to non employees			—				—				1,215
Shares issued for IP rights			—				—				446
(Gain) loss on disposal of property, plant and equipment			10				(12	)			100
Stock based compensation			525				1,390				17,785
Provision for restructuring			—				—				1,779
Amortization of issuance costs of Preferred Ordinary “C” shares			—				—				2,517
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			1,500				675				(73	)
Accounts payable and other current liabilities			(289	)			(2,300	)			(5,123	)
Net cash used in operating activities			(12,618	)			(12,302	)			(195,400	)
Investing activities:
Purchase of ALIGN			—				—				(3,763	)
Purchase of property, plant and equipment			(13	)			(8	)			(8,831	)
Proceeds from sale of property, plant and equipment			13				35				152
Purchase of short-term investments			—				—				(156,657	)
Redemptions of short-term investments, net of maturities			1,502				—				162,729
Net cash provided by (used in) investing activities			1,502				27				(6,370	)
Financing activities:
Payment of capital lease obligations			—				—				(3,719	)
Proceeds from issuance of ordinary and preferred ordinary shares, net of issuance costs			—				—				90,858
Proceeds from issuance of common stock and warrants, net of issuance costs			2,867				16,572				96,400
Net proceeds from stock options and warrants exercised			—				2,710				2,880
Payment of preferred stock dividend			(307	)			—				(1,534	)

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

										Period from
										August 13, 1996
		Nine Months Ended								(inception) to
		September 30,								September 30,
		2009				2010				2010
		(Restated)								(Restated)
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			—				—				17,915
Costs associated with stock purchase			—				—				(1,951	)
Net cash provided by financing activities			2,560				19,282				220,439
Effect of exchange rate changes on cash and cash equivalents			(1,231	)			(18	)			(187	)
Net (decrease) increase in cash and cash equivalents			(9,787	)			6,989				18,482
Cash and cash equivalents at beginning of period			24,220				11,493				—
Cash and cash equivalents at end of period			14,433				18,482				18,482
Supplemental disclosure of cash flows information:
Cash received during the period for:
Interest			62				14				11,718
Taxes			1,527				1,067				17,507
Cash paid during the period for:
Interest			(75	)			(155	)			(1,914	)
Schedule of non-cash transactions:
Acquisitions of equipment purchased through capital leases			—				—				3,470
Issuance of Ordinary shares in connection with license agreements			—				—				592
Issuance of Ordinary shares on conversion of bridging loan			—				—				1,638
Issuance of Preferred Ordinary “C” shares on conversion of secured convertible loan notes and accrued interest			—				—				8,893
Issuance of Ordinary shares in lieu of cash bonus			—				—				164
Issuance of other long term payable on ALIGN acquisition			—				—				1,122
Dividends accrued but not paid on convertible exchangeable preferred shares			614				585				1,813
Deemed dividend on conversion of exchangeable preferred shares (1)			—				2,915				2,915

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

CYCLACEL PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Cyclacel Pharmaceuticals, Inc. (“Cyclacel” or the “Company”) is a development-stage biopharmaceutical company dedicated to the development and commercialization of novel, mechanism-targeted drugs to treat human cancers and other serious diseases. Cyclacel’s strategy is to build a diversified biopharmaceutical business focused in hematology and oncology based on a portfolio of commercial products and a development pipeline of novel drug candidates.

Clinical Programs

Cyclacel’s 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.

On September 13, 2010, the Company announced that it reached agreement with the U.S. Food and Drug Administration, or FDA, regarding a Special Protocol Assessment, or SPA, called SEAMLESS, on the design of a pivotal Phase 3 trial for the Company’s sapacitabine oral capsules as a front-line treatment in elderly patients aged 70 years or older with newly diagnosed AML who are not candidates for intensive induction chemotherapy. SEAMLESS is a registration-directed, randomized clinical trial of sapacitabine oral capsules to be conducted under the SPA and will be a randomized study against an active control drug with the primary objective of demonstrating an improvement in overall survival.

In June 2010, at the American Society of Clinical Oncology, or ASCO, meeting the Company reported interim response data for the ongoing Phase 2 clinical trial of sapacitabine in older patients with MDS. The study has recently completed enrollment of patients aged 60 or older with MDS who were previously treated with azacitidine or decitabine or both.

In June 2010, the Company announced that the FDA, granted orphan drug designation to the Company’s sapacitabine product candidate for the treatment of both AML and MDS.

The Company has additional clinical programs in development which are currently pending availability of clinical data. Once data become available and are reviewed, the Company will determine the feasibility of pursuing further development and/or partnering these assets, including sapacitabine in combination with seliciclib, seliciclib in NSCLC and nasopharyngeal cancer or NPC and CYC116.

Commercial Products

The Company markets directly in the United States Xclair^® Cream for radiation dermatitis and Numoisyn^® Liquid and Numoisyn^® Lozenges for xerostomia.

Basis of Presentation

As a development-stage company, substantially all the Company’s efforts 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. The Company was incorporated in the state of Delaware in 1996 and is headquartered in Berkeley Heights, New Jersey, with a research facility located in Dundee, Scotland.

The condensed consolidated balance sheets as of September 30, 2010, the condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009, and related disclosures contained in the accompanying notes are unaudited. The condensed consolidated balance sheets as of December 31, 2009 is derived from the audited consolidated financial statements included in the 2009 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. or the SEC. The condensed consolidated financial statements are presented on the basis of accounting principles that are generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the condensed consolidated balance sheets as of September 30, 2010, the results of operations for the three and nine months ended September 30, 2010 and 2009 and the consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009 have been made. The interim results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010 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, 2009, included in the Company’s Annual Report on Form 10-K/A filed with the SEC on May 17, 2010 and subsequently amended again on May 19, 2010. The Form 10-K/A was filed to restate the Company’s previously issued consolidated financial statements for the years ended December 31, 2009, 2008 and 2007. The restatement was filed for the purpose of correcting the Company’s net loss per share calculation and disclosures in the consolidated statements of cash flows related to the payment of preferred dividends. The restatement is described below.

Throughout 2007, 2008 and 2009, the Company had outstanding 2,046,813 shares of 6% Convertible Exchangeable Preferred Stock, or the Preferred Stock. The holders of the Preferred Stock are entitled to receive, when, as and if declared, a cash dividend at the annual rate of 6% of the liquidation preference of the Preferred Stock, which dividend is payable quarterly on the first day of February, May, August and November. Until April 6, 2009, the Company declared and paid these dividends. However, as part of the Company’s operating plan to reduce expenditure, on April 6, 2009, June 22, 2009, October 19, 2009, January 7, 2010, March 29, 2010 and July 16, 2010 the Company’s board of directors resolved not to declare payment of the cash dividend, which unpaid dividends are accrued.

Although the Company accrued for the unpaid dividends in its consolidated financial statements, it did not include the accrued amount when calculating basic and diluted loss per share of common stock for the year ended December 31, 2009. Similar errors occurred in 2007 and 2008 in the net loss per share disclosure.

The following tables set forth the effects of the restatement relating to net loss per share on affected line items within the Company’s previously reported Consolidated Statements of Operations for the three and nine months ended September 30, 2009. The restatement has no effect on net cash flows, the reported net loss or the consolidated balance sheet in each of the periods.

Effect on Consolidated Statements of Operations:

		For the three months				For the nine months
		ended September 30,				ended September 30,
		2009				2009
		($000s except for per share amounts)
Net loss as reported			(3,124	)			(15,233	)
Restatement changes:
Less: preferred dividends			(307	)			(921	)
Net loss attributable to common shareholders			(3,431	)			(16,154	)
Weighted-average shares outstanding during the period			23,172,259				21,356,206
Loss per share (basic and diluted) as reported			(0.13	)			(0.71	)
Restatement changes			(0.02	)			(0.05	)
Basic and diluted, as restated			(0.15	)			(0.76	)

Cash flows disclosures:

There were errors related to the presentation and disclosure of the Company’s Preferred Stock dividends in the statement of cash flows in 2007 through and including 2009. In 2009, the Preferred Stock dividend of $307,000 paid on February 1, 2009 was disclosed incorrectly in the statement of cash flows within Net cash used in operating activities and should have been disclosed within Financing activities. Other disclosure errors were related to the terms of the make-whole dividend payment feature of the Company’s Preferred Stock. This make-whole dividend payment feature was considered to be an embedded derivative and was recorded on the balance sheet at fair value as a current liability. As a consequence of this feature, which expired in November 2007, amounts paid with respect to the period of the make-whole provision should be disclosed in Net cash used in operating activities rather than financing activities. Additionally, in the Supplemental cash flow information; Schedule of non-cash items, the Company disclosed accrued dividends on Preferred Stock for 2007 through and including 2009. All of the errors described above have been corrected in the consolidated statements of cash flows. These errors had no effect on the net cash flows or any impact on the consolidated balance sheet or consolidated statement of operations.

Subsequent Developments

The Certificate of Designations governing the Company’s Preferred Stock provides that if the Company fails to pay dividends on its Preferred Stock for six quarterly periods, holders of Preferred Stock are entitled to nominate and elect two directors to the Company’s board of directors. This right accrued to the Preferred Stockholders as of August 2, 2010. On October 4, 2010, the Company held a special meeting of the holders of its Preferred Stock for the purpose of electing two directors to the Company’s Board of Directors.

The meeting was adjourned to Monday, November 1, 2010, because a quorum of the holders of the Company’s Preferred Stock was not present in person or represented by proxy to transact business at the meeting. The adjournment was approved by a vote of 324,678 shares of Preferred Stock, with no shares voted against the adjournment, thus constituting approval by more than the majority of the holders of the Preferred Stock represented in person or by proxy at the meeting and entitled to vote on the adjournment.

The previously adjourned meeting was held on November 1, 2010, at 1:00 p.m. A quorum was not reached at the November 1, 2010 meeting either, with 505,773 shares of Preferred Stock present in person and by proxy at the meeting, representing only 41.69% of the issued and outstanding shares of the Company’s Preferred Stock. The meeting was not further adjourned.

On October 4, 2010, the Company entered into a purchase agreement with certain institutional investors pursuant to which it sold an aggregate of 8,323,190 of its units, at a per unit price of $1.82625, for total gross proceeds of approximately $15.2 million. Each unit consisted of (i) one share of the Company’s common stock and (ii) 0.5 of a warrant, each whole warrant representing the right to acquire one share of common stock at an exercise price of $1.92 per share, subject to adjustment, for a period of five years from the date of issuance. In addition, pursuant to the terms of that purchase agreement, the Company granted to each investor the non-transferable option to purchase up to a total of 4,161,595 additional units at a per unit price of $1.67, such option being exercisable at any time up to nine months from the closing date, or July 6, 2011. The transaction closed on October 7, 2010.

The Company has decided not to declare the quarterly cash dividend on the Preferred Stock with respect to the third quarter of 2010 that would have otherwise been payable on November 1, 2010.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries for the indicated periods. All significant intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates on an ongoing basis. The estimates were based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates.

Cash and Cash Equivalents

Cash equivalents are stated at cost when purchased, 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 acquisition to be cash equivalents. The objectives of the Company’s cash management policy are the safety and preservation of funds, liquidity sufficient to meet the Company’s cash flow requirements and attainment of a market rate of return.

Trade Accounts Receivable and Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on aging categories and historical collection experience, taking into consideration the type of payer, historical and projected collection experience, and current economic and business conditions that could affect the collectability of the Company’s receivables. The allowance for doubtful accounts is reviewed at a minimum, on a quarterly basis. Changes in the allowance for doubtful accounts are recorded as an adjustment to bad debt expense within general and administrative expenses. Material revisions to reserve estimates may result from adverse changes in collection experience. The Company writes off accounts against the allowance for doubtful accounts when reasonable collection efforts have been unsuccessful and it is probable the receivable will not be recovered.

Inventory

Cyclacel values inventories at the lower of cost or market. The Company determines cost using the first-in, first-out method. As December 31, 2009 and September 30, 2010, all inventories were classified as finished goods. The Company analyzes its inventory levels to identify inventory that may expire prior to sale, inventory that has a cost basis in excess of its estimated realizable value, or inventory in excess of expected sales requirements. The determination of whether or not inventory costs will be realizable requires estimates by the Company’s management. A critical input in this determination is future expected inventory requirements, based on internal sales forecasts. The Company then compares these requirements to the expiry dates of inventory on hand. To the extent that inventory is expected to expire prior to being sold, the Company will write down the value of inventory. Expired inventory is disposed of and the related costs are written off. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required in future periods.

Revenue Recognition

Product sales

The Company recognizes revenue from product sales when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the selling price is fixed and determinable; and collectability is reasonably assured.

The Company offers a general right of return on these product sales, and has considered the guidance in ASC 605-15 “Revenue Recognition — Products” (“ASC 605-15”) and ASC 605 — 10 “Revenue Recognition — Overall” (“ASC 605-10”). Under these guidelines, the Company accounts for all product sales using the “sell-through” method. Under the sell-through method, revenue is not recognized upon shipment of product to distributors. Instead, the Company records deferred revenue at gross invoice sales price and deferred cost of sales at the cost at which those goods were held in inventory. The Company recognizes revenue when such inventory is sold through to the end user. To estimate product sold through to end users, the Company relies on third-party information, including information obtained from the Company’s distributor customers with respect to their inventory levels and sell-through to customers. For the nine months ended September 30, 2010, the Company recorded $0.2 million of product returns due to a higher than anticipated amount of returns related to expiring product with a two-year shelf-life previously sold into the marketplace. From the first quarter of 2010, the Company’s supplier has increased the product shelf-life on certain of the products to three years to assist in the management of the product supply chain.

Collaboration, research and development, and grant revenue

Certain of the Company’s revenues are earned from collaborative agreements. Consistent with its general revenue recognition policies, the Company recognizes revenue when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed and determinable; and collectability is reasonably assured. Determination of whether these criteria have been met is based on management’s judgments regarding the nature of the research performed, the substance of the milestones met relative to those the Company must still perform, and the collectability of any related fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Research and development revenues, which are earned under agreements with third parties for contract research and development activities, are recorded as the related services are performed. Milestone payments are non-refundable and recognized as revenue when earned, as evidenced by achievement of the specified milestones and the absence of ongoing performance obligations. Any amounts received in advance of performance are recorded as deferred revenue. None of the revenues recognized to date are refundable if the relevant research effort is not successful.

Grant revenues from government agencies and private research foundations are recognized as the related qualified research and development costs are incurred, up to the limit of the prior approval funding amounts. Grant revenues are not refundable.

Clinical Trial Accounting

Data management and monitoring of all of the Company’s clinical trials are performed by contract research organizations (“CROs”) or clinical research associates (“CRAs”). Typically, CROs and some CRAs bill monthly for services performed, and others bill based upon milestones achieved. For outstanding amounts, the Company accrues unbilled clinical trial expenses based on estimates of the level of services performed each period. Costs of setting up clinical trial sites for participation in the trials are expensed immediately as research and development expenses. Clinical trial site costs related to patient enrollment are accrued as patients are entered into the trial and any initial payment made to the clinical trial site is recognized upon execution of the clinical trial agreements and expensed as research and development expenses.

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, amortization of purchased technology and depreciation. Expenditures relating to research and development are expensed as incurred.

Foreign currency transactions and currency translation

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

The assets and liabilities of the Company’s international subsidiary are translated from its functional currency into United States dollars at exchange rates prevailing at the balance sheet date. Average rates of exchange during the period are used to translate the statement of operations, while historical rates of exchange are used to translate any equity transactions.

Translation adjustments arising on consolidation due to differences between average rates and balance sheet rates, as well as unrealized foreign exchange gains or losses arising on translation of intercompany loans which are of a long-term-investment nature, are recorded in other comprehensive income.

Warrants Liability

The Company issued warrants to purchase shares of common stock under the registered direct financings completed in February 2007. These warrants are being accounted for as a liability in accordance with ASC 815 “Derivatives and Hedging” (“ASC 815”). ASC 815 requires freestanding contracts that are settled in the Company’s own stock, including common stock warrants, to be classified as an equity instrument, asset or liability. Under the provisions of ASC 815, an instrument classified as an asset or a liability must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. A contract instrument designated as an equity instrument must be included within equity, and no subsequent fair value adjustments are required. The Company reviews the classification of its warrants at each balance sheet date. With respect to warrants issued in February 2007, the Company has classified those instruments as a liability pursuant to ASC 815, since the Company is unable to control all the events or actions necessary to settle the warrants in registered shares. The fair value of this liability is estimated using an option-pricing model, which includes variables such as the expected volatility of the Company’s share price, interest rates, and expected 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 changes in the valuation of the warrants liability.

At the date of the transaction in February 2007, 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. The value of the warrant shares is being marked to market each reporting period as a derivative gain or loss on the consolidated statement of operations until exercised or expiration. At December 31, 2009, the fair value of the warrants was $0.3 million (utilizing the following assumptions: risk free interest rate — 2.13%, expected volatility — 96%, expected dividend yield - 0%, and a remaining contractual life of 4.13 years). At September 30, 2010, the fair value of the warrants was approximately $0.8 million (utilizing the following assumptions: risk free interest rate — 0.64%, expected volatility — 112%, expected dividend yield — 0%, and a remaining contractual life of 3.38 years). The Company recognized the change in the value of warrants of approximately $0.1 million, as a gain on the consolidated statement of operations for each of the three months ended September 30, 2009 and 2010. For the nine months ended September 30, 2009 and 2010, the Company recognized the change in the value of warrants of approximately $0.2 million and $0.4 million, respectively, as a loss on the consolidated statement of operations.

Income Taxes

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company applies the guidance codified in ASC 740 “Income taxes” (“ASC 740”) on uncertain tax positions. The Company only recognizes tax benefits that it believes are more likely than not to be sustained upon review by the relevant taxing authority. The amount recognized is based on the amount that cumulatively is more likely than not be sustained.

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 2006 Equity Incentive Plan (“2006 Plan”), which was approved on March 16, 2006 and subsequently amended. The Company also has outstanding options under various stock-based compensation plans for employees and directors. These plans are described more fully in Note 6 “Stock-Based Compensation”. The Company accounts for these plans 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 an option-pricing model, which includes variables such as the expected volatility of the Company’s share price, the anticipated exercise behavior of the Company’s 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. The value of stock-based awards is recognized as expense over the service period, net of estimated forfeitures, using the straight-line attribution method. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results and future estimates may differ substantially from the Company’s current estimates.

Segments

The Company has determined its reportable segments in accordance with ASC 280 “Segment Reporting” (“ASC 280”). After consideration of its business activities and geographic area, the Company has concluded that it has 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 was 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.

		September 30,				September 30,
		2009				2010
Stock options			3,538,933				3,129,177
Restricted stock and restricted stock units			141,700				67,700
Convertible preferred stock			870,980				516,228
Common stock warrants			7,044,363				5,843,597
Total shares excluded from calculation			11,595,976				9,556,702

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 these items.

																		Period from
																		August 13,
																		1996
		For the three months								For the nine months								(inception) to
		ended September 30,								ended September 30,								September 30,
		2009				2010				2009				2010				2010
		($000s)								($000s)								($000s)
Net loss			(3,124	)			(3,807	)			(15,233	)			(12,849	)			(235,134	)
Other Comprehensive income/(loss)			(113	)			(72	)			47				(50	)			(30	)
Comprehensive loss			(3,237	)			(3,879	)			(15,186	)			(12,899	)			(235,164	)

3. FAIR VALUE MEASUREMENTS

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. ASC 820 “Fair Value Measurements and Disclosures” (“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 identical 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 considers counterparty credit risk in its assessment of fair value. The Company determined that it has not made any Level 1 or 3 measurements as of December 31, 2009 or September 30, 2010. The following financial assets and liabilities, which are reported at fair value on a recurring basis, have been valued using Level 2 inputs:

		December 31,				September 30,
		2009				2010
		($000s)
Warrants			342				785

The Company used the Black-Scholes option-pricing model with the following assumptions to value the above warrants:

		December 31,				September 30,
		2009				2010
Exercise price		$	8.44			$	8.44
Expected term		4.13 Yrs				3.38 Yrs
Risk free interest rate			2.13	%			0.64	%
Expected volatility			96	%			112	%
Expected dividend yield over expected term			—				—

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

		December 31,				September 30,
		2009				2010
		($000s)
Research and development tax credit receivable			1,096				524
Prepayments			456				323
Other current assets			179				210
Total prepaid expenses and other current assets			1,731				1,057

5. ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consisted of the following:

		December 31,				September 30,
		2009				2010
		($000s)
Accrued research and development			2,654				3,017
Accrued IP / Patent costs			283				205
Accrued compensation			136				70
Amount payable under license agreement (1)			651				—
Amount payable under guarantee (1)			796				—
Preferred dividend			1,228				1,213
Other current liabilities			961				1,136
			6,709				5,641

6. STOCK BASED COMPENSATION

Stock based compensation has been reported within expense line items on the consolidated statement of operations for the three and nine months ended September 30, 2009 and 2010 as shown in the following table:

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2009				2010				2009				2010
		($000s)								($000s)
Research and development			68				116				121				281
General and administrative			289				488				404				1,109
Stock-based compensation costs before income taxes			357				604				525				1,390

At the Company’s annual stockholders on May 14, 2008, the stockholders approved to increase the number of shares reserved under the 2006 Plan to 5,200,000 shares of the Company’s common stock, up from 3,000,000 shares. The shares reserved under the 2006 Plan have a maximum maturity of 10 years and generally vest over a four-year period from the date of grant.

A summary of activity for the options under the Company’s 2006 Plan for the nine months ended September 30, 2010 is as follows:

										Weighted
										Average
						Weighted				Remaining				Aggregate
						Average				Contractual				Intrinsic
		Options				Exercise Price				Term (years)				Value
														(in $000s)
Options outstanding at December 31, 2009			3,349,876			$	4.21				7.76				698
Granted			192,000			$	2.39
Exercised			(149,313	)		$	0.43
Expired			—
Cancelled / forfeited			(263,386	)		$	4.73
Options outstanding at September 30, 2010			3,129,177			$	4.24				7.12				1,219
Unvested at September 30, 2010			961,609			$	2.53				8.05				558
Vested and exercisable at September 30, 2010			2,167,568			$	4.99				6.71				661

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, vest ratably over four years, with 1/4 of the award vesting one year from the date of grant and 1/48 of the award vesting each month thereafter. However, certain awards made to executive officers vest over three to five years, depending on the terms of their employment with the Company.

ASC 718 also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. This analysis is evaluated quarterly and the forfeiture rate adjusted as necessary. Ultimately, the actual expense recognized over the vesting period is based on only those shares that vest.

The Company used the Black-Scholes option-pricing model with the following assumptions for stock option grants to employees and directors for the nine months ended September 30, 2009 and 2010:

		For the nine months
		ended September 30,
		2009		2010
Expected term		0.75 – 5 Yrs		5 – 6Yrs
Risk free interest rate		0.325 – 1.84%		2.37 – 2.96%
Expected volatility		65 – 169%		90 – 100%
Expected dividend yield over expected term		—		—
Resulting weighted average grant fair value		$0.39		$1.80

The expected term assumption was estimated using past history of early exercise behavior and expectations about future behaviors. Due to the Company’s limited existence of being a public company, the expected volatility assumption has been based on the historical volatility of peer companies over the expected term of the option awards.

Estimates of pre-vesting option forfeitures are based on the Company’s experience. Currently the Company uses a forfeiture rate of 0 — 50% 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.

During the third quarter of 2010, the Company reduced various forfeiture rates on certain grants that will come fully vested in the next twelve months reflecting the increased probability that the options will become fully vested in their entirety resulting in additional one time charge of approximately $0.2 million. In the second quarter of 2010, the Company adjusted forfeiture rates on certain awards granted in December 2006 from 8% to 0%, reflecting the increased likelihood that these remaining awards will vest in their entirety. This change in assumption resulted in approximately $0.1 million of additional compensation cost recognized for the quarter ended June 30, 2010. During the quarter ended March 31, 2009, the Company revised the forfeiture rates because actual forfeiture rates were higher than that previously estimated primarily due to the lapsing of stock option grants on the termination of employees. The revision to past forfeiture estimates for the three months ended March 31, 2009 resulted in a reversal of stock-based compensation cost recognized in prior years with a consequent net gain of approximately $0.2 million on the consolidated statement of operations. During both quarters ended September and June 30, 2009 the Company revised the forfeiture rates because actual forfeiture rates were higher than that previously estimated primarily due to the lapsing of stock option grants on the termination of employees. For the nine months ended September 30, 2009, the Company recognized a net cumulative credit of approximately $0.5 million with respect to the revised forfeiture rates. In connection with the reduction in workforce during the second quarter of 2009, the Company agreed to extend the option exercise term for terminated employees from 30 days to 9 months. In accordance with ASC 718, the Company recorded a charge of $0.3 million during the second quarter of 2009 related to this modification.

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.

There were no exercises of stock options during the nine months ended September 30, 2009. During the nine months ended September 30, 2010, there were 149,313 stock options exercised for proceeds totaling approximately $0.1 million. As the Company presently has tax loss carry forwards from prior periods and expects to incur tax losses in 2010, the Company is not able to benefit from the deduction for exercised stock options in the current reporting period.

Cash used to settle equity instruments granted under share-based payment arrangements amounted to $0 during all periods presented.

Restricted Stock

In November 2008, the Company issued restricted common stock to an employee subject to certain forfeiture provisions. Specifically, one quarter of the award vests one year from the date of grant and 1/48 of the award effectively vests each month thereafter. This restricted stock grant is accounted for at fair value at the date of grant and an expense is recognized during the vesting term. Summarized information for restricted stock grants for the nine months ended September 30, 2010 is as follows:

						Weighted Average Grant
		Restricted Stock				Date Value Per Share
Non-vested at December 31, 2009			36,458			$	0.44
Vested			(9,378	)		$	0.44
Non-vested at September 30, 2010			27,080			$	0.44

Restricted Stock Units

Restricted stock units were issued to senior executives of the Company in November 2008, which entitle the holders to receive a specified number of shares of the Company’s common stock over the four year vesting term. 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 during the vesting term. Summarized information for restricted stock units grants for the nine months ended September 30, 2010 is as follows:

						Weighted Average Grant
		Restricted Stock Units				Date Value Per Share
Non-vested at December 31, 2009			54,687			$	0.44
Vested			(14,067	)		$	0.44
Non-vested at September 30, 2010			40,620			$	0.44

7. COMMITMENTS AND CONTINGENCIES

Restructuring

In 2005, the Company recorded an accrued restructuring liability associated with abandoning the facility in Bothell, Washington. The lease term on this space expires December 2010. The Bothell restructuring liability was computed as the present value of the difference between the remaining lease payments due less the estimate of net sublease income and expenses. The accrual balance was adjusted in 2006 to reflect a change in estimate due to continued deterioration in the local real estate market. As of September 30, 2010, the Bothell accrued restructuring liability was $0.2 million. This represents the Company’s best estimate of the fair value of the liability. Subsequent changes in the liability due to accretion, or changes in estimates of sublease assumptions, etc. will be recognized as adjustments to restructuring charges in future periods.

The Company records payments of rent related to the Bothell facility as a reduction in the amount of the accrued restructuring liability. Accretion expense is recognized due to the passage of time and is reflected in Selling, General and Administrative costs and Interest Expense on the condensed consolidated statement of operations. Based on the Company’s current projections of estimated sublease income and a discount rate of 7.8%, the Company expects to record additional accretion expense of approximately $2,000 over the remaining term of the lease.

The restructuring accrual at September 30, 2010 is as follows:

		$000s
Restructuring provision at December 31, 2009			1,062
Accretion expense for the current period			40
Payments made in the period			(903	)
As of September 30, 2010			199
Less: amounts due within one year			(199	)
Other accrued restructuring charges — long term			—

Guarantee

On July 28, 2005 and as amended on March 27, 2006, Cyclacel Group plc (“Group”) signed a convertible Loan Note Instrument constituting convertible unsecured loan notes and entered into a Facility Agreement (“Agreement”) with Scottish Enterprise (“SE”), as lender, whereby SE subscribed for £5 million, or approximately $9 million at the time, of the convertible loan notes. The loan was subsequently converted into 1,231,527 preferred D shares of the Group in satisfaction of all amounts owed by Group under the convertible loan notes. The number of preferred D shares that SE received was calculated by dividing the principal amount outstanding under the loan note by £4.06. The preferred D shares were exchanged for shares in Xcyte Therapies, Inc. on March 27, 2006 as part of the transaction between Xcyte and Cyclacel Limited. However, SE retained the ability it had under the Agreement to receive a cash payment should the research operations in Scotland be significantly reduced. Cyclacel Limited guaranteed approximately £5 million, the amount potentially due to SE, which will be 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 SE at the time of any significant reduction in research facilities.

On June 22, 2009, the Company amended the Agreement with SE (“the Agreement”), 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 $7.9 million at September 30, 2010), which SE had previously entered into with the Company. The Agreement, provided for repayment of £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 (approximately $0.8 million) 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 will guarantee approximately £4 million, the amount potentially due to SE, which will be calculated as a maximum of £4 million less the market value of the shares held (or would have held in the event they dispose of any shares) by SE at the time of any further reduction in research facilities. This resulted in a charge to the income statement in the second quarter of 2009 of £1million ($1.7 million), with the outstanding liability being recorded under accrued liabilities on the condensed consolidated balance sheet as at December 31, 2009.

Supply arrangements

In connection with the asset acquisition of ALIGN on October 5, 2007, the Company acquired license agreements for the exclusive rights to sell and distribute three products in the United States. The Company, as part of securing long term supply arrangements had commitments to make future payments totaling approximately $1.3 million of which $0.6 million was paid in May 2009 and the remainder of $0.7 million was paid in May 2010.

Purchase Obligations

The Company has a minimum purchase obligation in relation to the purchase of manufactured products within the ALIGN business equivalent to the value of product purchased in the previous year. For the year endeding December 31, 2010, the minimum purchase obligation has already been fulfilled.

Licensing Agreements

Cyclacel has entered into a number of licensing agreements that require the Company to make payments to the other party to the agreement upon the Company attaining certain milestones as defined in the agreements. The Company may be required to make future milestone payments, totaling approximately $11.3 million, depending upon the success and timing of future clinical trials and the attainment of other milestones as defined in the respective agreements. The Company is also obligated to make future royalty payments to collaborators. The Company cannot reasonably determine the amount and timing of such royalty payments, if any.

8. STOCKHOLDERS’ EQUITY

Preferred stock

As of September 30, 2010, there were 1,213,142 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. Since inception until April 6, 2009, the Company declared and paid these dividends when due. However, as part of the Company’s program to reduce expenditure the Company’s Board of Directors resolved not to declare payment of, but continue to accumulate, the cash dividend. 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 0.42553 shares of common stock for each share of Preferred Stock based on a price of $23.50. During the nine months ended September 30, 2010, 833,671 shares of Preferred Stock were converted into 1,655,599 shares of the Company’s common stock. Since inception through September 30, 2010, holders have voluntarily converted 1,776,858 shares of Preferred Stock into common stock. The Company has reserved 516,228 shares of common stock for issuance upon conversion of the remaining shares of Preferred Stock outstanding at September 30, 2010. The shares of Preferred Stock have been retired and canceled and shall upon cancellation be 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 Certificate of Designations governing the Preferred Stock provides that if the Company fails to pay dividends on its Preferred Stock for six quarterly periods, holders of Preferred Stock are entitled to nominate and elect two directors to the Company’s Board of Directors. This right accrued to the Preferred Stock Stockholders as of August 2, 2010. On October 4, 2010, the Company held a special meeting of the holders of its Preferred Stock for the purpose of electing two directors to the Company’s Board of Directors.

The meeting was adjourned to Monday, November 1, 2010, because a quorum of the holders of the Company’s Preferred Stock was not present in person or represented by proxy to transact business at the meeting. The adjournment was approved by a vote of 324,678 shares of Preferred Stock, with no shares voted against the adjournment, thus constituting approval by more than the majority of the holders of the Preferred Stock represented in person or by proxy at the meeting and entitled to vote on the adjournment. The previously adjourned meeting was held on November 1, 2010, at 1:00 p.m. A quorum was not reached at the November 1, 2010 meeting either, with 505,773 shares of Preferred Stock present in person and by proxy at the meeting, representing only 41.69% of the issued and outstanding shares of the Company’s Preferred Stock. The meeting was not further adjourned.

Conversion of Convertible Preferred Stock

During the nine months ended September 30, 2010, Cyclacel entered into an agreement to exchange the Company’s Preferred Stock into shares of common stock. There were no exchanges of the Company’s Preferred Stock into shares of common stock in the three months ended September 30, 2010 and 2009. The table below provides details of the aggregate activities in 2010:

		For the nine months ended
		September 30, 2010
Preferred shares exchanged			833,671
Common shares issued:
At stated convertible option			354,752
Incremental shares issued under the exchange transaction			1,300,847
Total common shares issued:			1,655,599

As the Preferred Stock 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 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 approximately $0 and $2.9 million for the three and nine months ended September 30, 2010, respectively.

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

Common Stock

January 2010 Registered Direct Financings

On January 25, 2010, the Company completed the sale of 2,350,000 units in a “registered direct” offering at a purchase price of $2.50 per unit to certain institutional investors of the Company for gross proceeds of approximately $5.9 million. Each unit consisted of one share of the Company’s common stock and one warrant to purchase 0.30 of one share of its common stock. The warrants have a five-year term from the date of issuance, are exercisable beginning six months from the date of issuance and will be exercisable at an exercise price of $2.85 per share of common stock. As of September 30, 2010, warrants issued to the investors have been classified as equity. The transaction date fair value of the warrants of $1.0 million was determined utilizing the Black-Scholes option pricing model utilizing the following assumptions: risk free interest rate - 2.39%, expected volatility — 90%, expected dividend yield — 0%, and a remaining contractual life of 5.00 years. As of September 30, 2010, all the warrants are outstanding.

On January 13, 2010, the Company completed the sale of 2,850,000 units in a “registered direct” offering to certain institutional investors. Each unit was sold at a purchase price of $2.51 per unit and consists of one share of the Company’s common stock and one warrant to purchase 0.25 of one share of its common stock for gross proceeds of approximately $7.2 million. The warrants have a five-year term from the date of issuance, are exercisable beginning six months from the date of issuance and will be exercisable at an exercise price of $3.26 per share of common stock. As of September 30, 2010, warrants issued to the investors have been classified as equity. The transaction date fair value of the warrants of $1.3 million was determined utilizing the Black-Scholes option pricing model utilizing the following assumptions: risk free interest rate - 2.55%, expected volatility — 90%, expected dividend yield — 0%, and a remaining contractual life of 5.00 years. As of September 30, 2010, all the warrants are outstanding.

July 2009 Registered Direct Financing

On July 29, 2009, the Company sold its securities to select institutional investors consisting of 4,000,000 units in a “registered direct” offering at a purchase price of $0.85 per unit (each, a “Unit”). Each Unit consisted of (i) one share of the Company’s common stock, (the “Common Stock”), (ii) one warrant to purchase 0.625 of one share of Common Stock (a “Series I Warrant”) and (iii) one warrant to purchase 0.1838805 of one share of Common Stock (a “Series II Warrant”). The Series I Warrants had a seven-month term from the date of issuance, were exercisable beginning six months from the date of issuance and were exercisable at an exercise price of $1.00 per share of Common Stock. During the first quarter of 2010, all of The Series I Warrants were exercised for $2.5 million. The Series II Warrants have a five-year term from the date of issuance, are exercisable beginning six months from the date of issuance and are exercisable at an exercise price of $1.00 per share of Common Stock. During the first quarter of 2010, 43,266 common shares were issued upon exercise of warrants with proceeds of $43,266.

The sale of the Units was made pursuant to Subscription Agreements, dated July 23, 2009, with each of the investors. The net proceeds to the Company from the sale of the Units, after deducting for the placement agent’s fees and offering expenses, were approximately $2.9 million. As of September 30, 2010, the remaining Series II Warrants outstanding exercisable into 692,256 of the Company’s shares of common stock have been classified as equity. The transaction date fair value of the Series II Warrants of $0.6 million was determined utilizing the Black-Scholes option pricing model utilizing the following assumptions: risk free interest rate — 2.69%, expected volatility - 90%, expected dividend yield — 0%, and a remaining contractual life of 5.00 years.

December 2007 Committed Equity Financing Facility or CEFF

On December 10, 2007 and as amended on November 24, 2009, Cyclacel entered into a CEFF with Kingsbridge, in which Kingsbridge committed to purchase the lesser of 4,084,590 shares of common stock or $60 million of common stock from Cyclacel over a three-year period. Under the terms of the agreement, Cyclacel will determine the exact timing and amount of any CEFF financings, subject to certain conditions. All amounts “drawn down” under the CEFF will be settled via the issuance of Cyclacel’s common stock. Cyclacel may access capital under the CEFF in tranches of either (a) 2% of Cyclacel’s market capitalization at the time of the draw down or (b) the lesser of (i) 3% of Cyclacel’s market capitalization at the time of the draw down and (ii) an alternative draw down amount based on the product of (A) the average trading volume of the 30-day trading period preceding the draw down excluding the five highest and five lowest trading days during such period, (B) the volume-weighted average trading price (“VWAP”) on the trading day prior to the notice of draw down, (C) the number of days during the draw down period and (D) 85%, subject to certain conditions. Each tranche will be issued and priced over an eight-day pricing period. Kingsbridge will purchase shares of common stock pursuant to the CEFF at discounts ranging from 10% to 20% depending on the average market price of the common stock during the eight-day pricing period, provided that the minimum acceptable purchase price for any shares to be issued to Kingsbridge during the eight-day period is determined by the higher of $0.40 or 90% of Cyclacel’s common stock closing price the day before the commencement of each draw down.

For the three months ended September 30, 2010, the Company sold 1,255,717 shares of its common stock to Kingsbridge under the CEFF, in consideration of aggregate proceeds of approximately $1.8 million leaving approximately 10,000 shares of common stock which are available for draw down under the CEFF before its expiration on December 10, 2010. During 2010, the Company sold 2,818,925 shares of its common stock to Kingsbridge under the CEFF, in consideration of aggregate proceeds of $4.9 million. Since inception to September 30, 2010, the Company sold an aggregate of 4,073,949 shares of its common stock to Kingsbridge under the terms of the CEFF in consideration of an aggregate of $5.9 million.

In connection with an amendment to the CEFF dated November 24, 2009, the Company issued an amended and restated warrant to Kingsbridge to purchase 175,000 shares of its common stock at an exercise price of $1.40 per share, (from an original exercise price of $7.17), which represents 175% of the closing bid price of the Company’s common stock on the date prior to the date on which the amendment was signed. The warrant amends and restates the original warrant issued by the Company to Kingsbridge in connection with the CEFF. No other changes were made to the original warrant. As a result of the change in exercise price, the Company recorded an expense of approximately $44,000 during the fourth quarter of 2009. The warrant is exercisable, subject to certain exceptions, until December 12, 2012. During the first quarter of 2010, Kingsbridge exercised its warrant to purchase 75,000 shares of common stock for approximately $0.1 million.

As of September 30, 2010, the balance of the outstanding warrants issued to Kingsbridge has been classified as equity. The transaction date fair value of the warrant of $0.6 million was determined utilizing the Black-Scholes option pricing model utilizing the following assumptions: risk free interest rate — 3.605%, expected volatility — 70%, expected dividend yield — 0%, and a remaining contractual life of 5.5 years.

Common Stock Warrants

In connection with the Company’s February 16, 2007 “registered direct” offering the Company issued to investors warrants to purchase 1,062,412 shares of common stock. The warrants issued to the investors are being accounted for as a liability. At the date of the transaction, the fair value of the warrants of $6.8 million was determined utilizing the Black-Scholes option pricing model utilizing the following assumptions: risk free interest rate — 4.58%, expected volatility - 85%, expected dividend yield — 0%, and a remaining contractual life of 6.88 years. The value of the warrant shares is being marked to market each reporting period as a derivative gain or loss on the consolidated statement of operations until exercised or expiration. At December 31, 2009 and September 30, 2010, the fair value of the warrants determined utilizing the Black-Scholes option pricing model was approximately $0.3 million and $0.8 million, respectively. The fair value at September 30, 2010 reflects the increase in the Company’s common stock price of $1.72 per share at September 30, 2010 as compared to the common stock price of $1.04 per share at December 31, 2009. The Company recognized the change in the value of warrants of approximately $0.1 million, as a gain on the consolidated statement of operations for each of the three months ended September 30, 2009 and 2010. For the nine months ended September 30, 2009 and 2010, the Company recognized the change in the value of warrants of approximately $0.2 million and $0.4 million, respectively, as a loss on the consolidated statement of operations.

The following table summarizes information about warrants outstanding at September 30, 2010:

								Weighted
		Expiration		Common Shares				Average
Issued in Connection With		Date		Issuable				Exercise Price
April 2006 stock issuance		2013			2,571,429				7.00
February 2007 stock issuance		2014			1,062,412				8.44
December 2007 CEFF		2013			100,000				1.40
July 2009 Series II stock issuance		2014			692,256				1.00
January 2010 stock Issuance		2015			712,500				3.26
January 2010 stock Issuance		2015			705,000				2.85
Total					5,843,597			$	5.50

Exercise of Stock Options

There were no stock option exercises during the nine months ended September 30, 2009. During the nine months ended September 30, 2010, there were 149,313 stock option exercises totaling approximately $0.1 million.

9. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-17 “Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition, a consensus of the FASB Emerging Issues Task Force” (“ASU 2010-17”). The amendments in ASU No. 2010-17 deal with research and development contracts that are tied to completing a phase of a study or achieving a specific result in a research project. The objective of ASU 2010-17 is to provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Prior to issuance of ASU No. 2010-17, authoritative guidance on the use of the milestone method did not exist. An entity’s decision to use the milestone method of revenue recognition over other proportional revenue recognition methods is a policy decision made by the entity. Use of the milestone method will require certain disclosures. The guidance provided by ASU No. 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted, with certain restrictions. The Company does not expect the adoption of this new ASU to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued an amendment to the accounting standards related to the disclosures about an entity’s use of fair value measurements. Among these amendments, entities will be required to provide enhanced disclosures about transfers into and out of the Level 1 (fair value determined based on quoted prices in active markets for identical assets and liabilities) and Level 2 (fair value determined based on significant other observable inputs) classifications, provide separate disclosures about purchases, sales, issuances and settlements relating to the tabular reconciliation of beginning and ending balances of the Level 3 (fair value determined based on significant unobservable inputs) classification and provide greater disaggregation for each class of assets and liabilities that use fair value measurements. Except for the detailed Level 3 roll-forward disclosures, the new standard is effective for the Company for interim and annual reporting periods beginning after December 31, 2009. The adoption of this accounting standards amendment did not have a material impact on the Company’s consolidated financial statements. The requirement to provide detailed disclosures about the purchases, sales, issuances and settlements in the roll-forward activity for Level 3 fair value measurements is effective for the Company for interim and annual reporting periods beginning after December 31, 2010. The Company does not expect that the adoption of these new disclosure requirements will have a material impact on its consolidated financial statements.

In February 2010, the FASB issued an amendment to the accounting standards related to the accounting for, and disclosure of, subsequent events in an entity’s consolidated financial statements. This standard amends the authoritative guidance for subsequent events that was previously issued and among other things exempts Securities and Exchange Commission registrants from the requirement to disclose the date through which it has evaluated subsequent events for either original or restated financial statements. This standard does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provides different guidance on the accounting treatment for subsequent events or transactions. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

10. SUBSEQUENT EVENTS

The Certificate of Designations governing the Preferred Stock provides that if the Company fails to pay dividends on its Preferred Stock for six quarterly periods, holders of Preferred Stock are entitled to nominate and elect two directors to the Company’s Board of Directors. This right accrued to the Preferred Stockholders as of August 2, 2010. On October 4, 2010, the Company held a special meeting of the holders of its Preferred Stock for the purpose of electing two directors to the Company’s Board of Directors.

The meeting was adjourned to Monday, November 1, 2010, because a quorum of the holders of our Preferred Stock was not present in person or represented by proxy to transact business at the meeting. The adjournment was approved by a vote of 324,678 shares of Preferred Stock, with no shares voted against the adjournment, thus constituting approval by more than the majority of the holders of the Preferred Stock represented in person or by proxy at the meeting and entitled to vote on the adjournment.

The previously adjourned meeting was held on November 1, 2010, at 1:00 p.m. A quorum was not reached at the November 1, 2010 meeting either, with 505,773 shares of Preferred Stock present in person and by proxy at the meeting, representing only 41.69% of the issued and outstanding shares of the Company’s Preferred Stock. The meeting was not further adjourned.

On October 4, 2010, the Company entered into a purchase agreement with certain institutional investors pursuant to which it sold an aggregate of 8,323,190 of its units, at a per unit price of $1.82625, for total gross proceeds of approximately $15.2 million. Each unit consisted of (i) one share of the Company’s common stock and (ii) 0.5 of a warrant, each whole warrant representing the right to acquire one share of common stock at an exercise price of $1.92 per share, subject to adjustment, for a period of five years from the date of issuance. In addition, pursuant to the terms of that purchase agreement, the Company granted to each investor the non-transferable option to purchase up to a total of 4,161,595 additional units at a per unit price of $1.67, such option being exercisable at any time up to nine months from the closing date, or July 6, 2011. The sale of the units and the related option closed on October 7, 2010.

The Company has decided not to declare the quarterly cash dividend on the Preferred Stock with respect to the third quarter of 2010 that would have otherwise been payable on November 1, 2010.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including, without limitation, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. The forward-looking statements are based on various factors and were derived using numerous assumptions. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar expressions.

Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including those set forth in Part I, Item 1A, entitled “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, and updated and supplemented by Part II, Item 1A, entitled “Risk Factors,” appears elsewhere in this Quarterly Report. These factors as well as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, “Cyclacel,” the “Company,” “we,” “us,” and “our” refer to Cyclacel Pharmaceuticals, Inc.

Overview

We are a development-stage biopharmaceutical company dedicated to the development and commercialization of novel, mechanism-targeted drugs to treat human cancers and other serious diseases. Our strategy is to build a diversified biopharmaceutical business focused in hematology and oncology based on a portfolio of commercial products and a development pipeline of novel drug candidates.

Clinical programs

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.

The planning, execution and results of our clinical programs are significant factors that can affect our operating and financial results. In our sapacitabine clinical program we:

•

announced on September 13, 2010 that we had reached agreement with the U.S. Food and Drug Administration, or FDA, regarding a Special Protocol Assessment, or SPA, called SEAMLESS, on the design of a pivotal Phase 3 trial for the Company’s sapacitabine oral capsules as a front-line treatment in elderly patients aged 70 years or older with newly diagnosed AML who are not candidates for intensive induction chemotherapy. SEAMLESS is a registration-directed randomized clinical trial of sapacitabine oral capsules to be conducted under the SPA and will be randomized against an active control drug with the primary objective of demonstrating an improvement in overall survival. Sapacitabine will be administered as an outpatient treatment.

•

reported in June 2010, at the American Society of Clinical Oncology, or ASCO, meeting interim response data for the ongoing Phase 2 clinical trial of sapacitabine in older patients with MDS. The study has recently completed enrollment of 61 patients aged 60 or older with MDS who were previously treated with azacitidine or decitabine or both. In this three-arm study Arms B & C enrolled 20 patients each while Arm A enrolled 21 patients across the same three dosing schedules of sapacitabine (Arms A, B and C) tested in the AML stratum of the study. All patients have received at least one hypomethylating agent and 15 patients (25%) have received two hypomethylating agents, i.e., azacitidine and decitabine. Approximately 51% of the 61 patients had baseline bone marrow blast counts above 10%. Based on interim data, the overall response rate is 24% on Arm A, the 7-day low dose schedule, 35% on Arm B, the 7-day high dose schedule, and 10% on Arm C, the 3-day high dose schedule. Two patients achieved complete remission and both were treated on Arm A. Thirty-day mortality from all-causes is 4.8% on Arm A, 0% on Arm B and 15% on Arm C. Approximately 34% of the patients received 4 or more cycles of sapacitabine; and

•

announced in June 2010 that FDA, granted orphan drug designation to our sapacitabine product candidate for the treatment of both AML and MDS.

We have additional clinical programs in development which are currently pending availability of clinical data. Once data become available and are reviewed, we will determine the feasibility of pursuing further development and/or partnering these assets, including sapacitabine in combination with seliciclib, seliciclib in NSCLC and nasopharyngeal cancer or NPC and CYC116.

Our pipeline and expertise in cell cycle biology

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 are generating several families of anticancer drugs that act on the cell cycle including nucleoside analogues, cyclin dependent kinase, or CDK inhibitors and Aurora kinase/Vascular Endothelial Growth Factor Receptor 2, or AK/VEGFR2 inhibitors. Although a number of pharmaceutical and biotechnology companies are currently attempting to develop nucleoside analogues, CDK inhibitor and AK inhibitor drugs, we believe that our drug candidates are differentiated in that they are orally available and interact with unique target profiles and mechanisms. For example we believe that our sapacitabine is the only orally available nucleoside analogue to be tested in a Phase 3 trial for AML and in a Phase 2 trial in MDS and seliciclib is the most advanced orally available CDK inhibitor in Phase 2 trials. Although our resources are primarily directed towards advancing our anticancer drug candidate sapacitabine through in-house development activities we are also progressing, but with lower levels of investment than in previous years, our other novel drug series, which are at earlier stages. As a consequence of our focus on sapacitabine clinical development and related cost reduction program, research and development expenditures for the nine months ended September 30, 2010 were reduced by $2.2 million, or 31%, to $5.0 million compared to $7.2 million for the nine months ended September 30, 2009.

We have retained rights to commercialize our clinical development candidates and our business strategy is to enter into selective partnership arrangements with these programs.

Commercial products

We market directly in the United States Xclair^® Cream for radiation dermatitis and Numoisyn^® Liquid and Numoisyn^® Lozenges for xerostomia. All three products are approved in the United States under FDA 510 (k) or medical device registrations. As described below under “Results of Operations,” for each of the three months ended September 30, 2009 and 2010, we recognized product revenue totaling $0.2 million. For the nine months ended September 30, 2009 and 2010, we recognized revenue totaling $0.7 million and $0.4 million, respectively.

General

Our corporate headquarters is located in Berkeley Heights, New Jersey, with a research facility located in the United Kingdom.

From our inception in 1996 through September 30, 2010, we have devoted substantially all our efforts and resources to our research and development activities. We have incurred significant net losses since inception. As of September 30, 2010, our accumulated deficit during the development stage was approximately $238.0 million. We expect to continue incurring substantial losses for the next several years as we continue to develop our clinical and preclinical drug candidates. Our operating expenses comprise research and development expenses and selling and general and administrative expenses.

To date, we have not generated significant product revenue but have financed our operations and internal growth through public offerings, private placements, licensing revenue, interest on investments, government grants and research and development tax credits. Prior to October 2007, our revenue consisted of collaboration and grant revenue. Beginning in 2008, we recognized revenue from sales of commercial products, for the first time, following the ALIGN acquisition in October 2007. We have recognized revenues from inception through September 30, 2010 totaling approximately $8.9 million of which approximately $2.1 million is derived from product sales, approximately $3.1 million from fees under collaborative agreements and approximately $3.7 million of grant revenue from various government grant awards.

Subsequent Events

The Certificate of Designations governing the Preferred Stock provides that if the Company fails to pay dividends on its Preferred Stock for six quarterly periods, holders of Preferred Stock are entitled to nominate and elect two directors to the Company’s Board of Directors. This right accrued to the Preferred Stockholders as of August 2, 2010. On October 4, 2010, the Company held a special meeting of the holders of its Preferred Stock for the purpose of electing two directors to the Company’s Board of Directors.

The meeting was adjourned to Monday, November 1, 2010, because a quorum of the holders of our Preferred Stock was not present in person or represented by proxy to transact business at the meeting. The adjournment was approved by a vote of 324,678 shares of Preferred Stock, with no shares voted against the adjournment, thus constituting approval by more than the majority of the holders of the Preferred Stock represented in person or by proxy at the meeting and entitled to vote on the adjournment. The previously adjourned meeting was held on November 1, 2010, at 1:00 p.m. A quorum was not reached at the November 1, 2010 meeting either, with 505,773 shares of Preferred Stock present in person and by proxy at the meeting, representing only 41.69% of the issued and outstanding shares of our Preferred Stock. The meeting was not further adjourned. We have decided not to declare the quarterly cash dividend on the Preferred Stock with respect to the third quarter of 2010 that would have otherwise been payable on November 1, 2010.

On October 4, 2010, we entered into a purchase agreement with certain institutional investors pursuant to which we sold an aggregate of 8,323,190 units, at a per unit price of $1.82625, for total gross proceeds of approximately $15.2 million. Each unit consisted of (i) one share of our common stock and (ii) 0.5 of a warrant, each whole warrant representing the right to acquire one share of common stock at an exercise price of $1.92 per share, subject to adjustment, for a period of five years from the date of issuance. In addition, pursuant to the terms of that purchase agreement, we granted to each investor the non-transferable option to purchase up to a total of 4,161,595 additional units at a per unit price of $1.67, such option being exercisable at any time up to nine months from the closing date, or July 6, 2011. The transaction closed on October 7, 2010.

Results of Operations

The results of operations for the three and nine months ended September 30, 2009 and 2010 and balance sheet data as at December 31, 2009 and September 30, 2010 reflect the operations of us and our subsidiaries.

Three Months Ended September 30, 2009 and 2010

Revenues

The following table summarizes the components of our revenues for the three months ended September 30, 2009 and 2010:

		Three months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Product revenue			223				159				(64	)			(29	)
Grant revenue			7				—				(7	)			(100	)
Total revenue			230				159				(71	)			(31	)

Product revenue is derived from the sale of Xclair^® Cream, Numoisyn^® Liquid and Numoisyn^® Lozenges. For the three months ended September 30, 2009 and 2010, product sales were approximately $223,000 and $159,000 respectively. The decrease in product revenue in the third quarter of 2010 as compared to the third quarter in 2009 was a result of us increasing our provisions for product returns and fully reserving against, and therefore not recognizing sales of product shipped which is approaching six-month expiration date.

Grant revenue is recognized as we incur and pay for qualifying costs and services under the applicable grant. Grant revenue is primarily derived from various United Kingdom government grant awards. There was no grant revenue during the three months ending September 30, 2010 due to our programs not qualifying for these grant awards.

The future

We expect the ALIGN sales trend to approximate the first quarter 2010 levels as a result of all product inventory being long-dated Also, from the first quarter of 2010, our supplier has increased the product shelf-life on a certain product to three years to assist in the management of the product supply chain. We do not expect that grant revenue will be significant as we focus our expenditure on the advancement of sapacitabine, which is currently waiting to advance into a Phase 3 clinical trial, and away from grant qualifying research expenditure.

Cost of goods sold

		Three months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Cost of goods sold			163				76				(87	)			(53	)

During the three months ended September 30, 2009 and 2010, total cost of sales represented 73% and 48% of product revenue respectively. During the third quarter of 2009, a provision was taken against short dated inventory of approximately $48,000. No such provision was recorded during the third quarter of 2010.

Research and development expenses

To date, we have focused on drug discovery and development programs, with particular emphasis on orally available anticancer agents. Our research and development expenses have represented costs incurred to discover and develop novel small molecule therapeutics, including clinical trial costs for sapacitabine, seliciclib, sapacitabine in combination with seliciclib, and CYC116. We have also incurred costs in the advancement of product candidates toward clinical and preclinical trials and the development of in-house research to advance our biomarker program and technology platforms. However, during 2008 and 2009, in response to changing market conditions, we extensively reduced or stopped expenditure on development and preclinical activities outside of our core focus on sapacitabine. The benefit of these cost reductions was realized in 2009 and will also be realized in 2010. 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 expenditure for the three months ended September 30, 2009 and 2010:

		Three months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Sapacitabine			1,426				1,189				(237	)			(17	)
Seliciclib			(244	)			(12	)			232				95
CYC116			21				5				(16	)			(76	)
Other research and development costs			191				287				96				50
Total research and development expenses			1,394				1,469				75				5

Total research and development expenses represented 37% and 35% of our operating expenses for the three months ended September 30, 2009 and 2010, respectively.

Research and development expenditure increased by $0.1 million to $1.5 million for the three months ended September 30, 2010 from $1.4 million for the three months ended September 30, 2009. Sapacitabine costs decreased by $0.2 million from $1.4 million for the three months ended September, 30, 2009 to $1.2 million for the three months ended September 30, 2010 as Phase 2 trials completed patient recruitment. For the three months ended September 30, 2010, there was a net credit for the seliciclib program of $12,000 representing the release of accrued study close out fees, which will not now be incurred. For the three months ended September 30, 2009, there was a net credit for the seliciclib program due to the reversal of accruals related to clinical trial costs of the APPRAISE trial.

The future

Following our reduction of expenditure in 2008 and 2009 in our non-core research and development programs, we have concentrated our resources on the development of sapacitabine in three indications. We anticipate that overall research and development expenditures in 2010 will be lower or similar to 2009 levels. We expect our research and development expenses to increase from the 2010 levels as a result of running the Phase 3 SEAMLESS trial. As Phase 3 clinical trials are time-consuming and expensive, and because we have limited resources, we may be required to collaborate with a third party or raise additional funds. However, there is no assurance that we will be able to do so.

Selling, general and administrative expenses

Selling, general and administrative expenses include costs for sales and marketing and administrative personnel, legal and other professional expenses and general corporate expenses. The following table summarizes the selling, general and administrative expenses for the three months ended September 30, 2009 and 2010:

		Three months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Total selling, general and administrative expenses			2,188				2,612				424				19

Total selling, general and administrative expenses represented 58% and 63% of our operating expenses for the three months ended September 30, 2009 and 2010, respectively.

Our selling, general and administrative expenditure increased by $0. 4 million to $2.6 million for the three months ended September 30, 2010 from $2.2 million for the three months ended September 30, 2009. The increase of $0.4 million in expenses was primarily attributable to an increase in professional and consultancy fees of $0.2 million, stock-based compensation costs of $0.2 million and legal costs of $0.1 million offset by a decrease in employment related costs of $0.1 million.

The future

We expect our selling, general and administrative expenses in 2010 to remain at approximately the same levels for the balance of 2010.

Other income (expense)

The following table summarizes other income (expense) for the three months ended September 30, 2009 and 2010:

		Three months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Change in valuation of warrants			101				73				(28	)			(28	)
Foreign exchange losses/(gains)			119				(25	)			(144	)			(121	)
Interest income			7				7				—				—
Interest expense			(41	)			(7	)			34				83
Total other income (expense)			186				48				(138	)			(74	)

Total other income and expense, net, decreased by approximately $138,000 from net income of $0.2 million for the three months ended September 30, 2009 to a net income of approximately $48,000 for the three months ended September 30, 2010. The most significant impact was from the change in realized foreign exchange losses and gains due to a favorable movement of the British Pound compared to the United States dollar.

The change in valuation of warrants relates to the issue of warrants to purchase shares of our common stock under the registered direct financing completed in February 2007. The warrants issued to the investors are classified as a liability under generally accepted accounting principles. The value of the warrants is being marked to market each reporting period as a derivative gain or loss until exercised or expiration. For each of the three months ended September 30, 2009 and 2010, the change in the value of warrants was a gain of $0.1 million.

For the three months ended September 30, 2009 there were foreign exchange gains of approximately $0.1 million recorded as compared to a loss of approximately $25,000 for the three months ended September 30, 2010 on the consolidated statement of operations within the separate line item foreign exchange gains/(losses), within other income (expense).

Interest income remained stable at approximately $7,000 for both of the three months to September 30, 2009 and 2010 as interest rates remained the same.

Interest expense reduced by $34,000 from approximately $41,000 for the three months ended September 30, 2009 to $7,000 for the three months ended September 30, 2010. This reduction was due to the settlement of license payments which eliminated interest expense. In addition accretion costs on restructuring charges in respect of the lease of the Bothell facility have reduced as we reach the end of the lease.

The future

The valuation of the warrant liability will continue to be re-measured at the end of each reporting period. The valuation of the warrants is dependent upon many factors, including our stock price, interest rates and the remaining term of the instrument and may fluctuate significantly, which may have a significant impact on our statement of operations.

Income tax benefit

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

The following table summarizes research and development tax credits for the three months ended September 30, 2009 and 2010:

		Three months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Total income tax benefit			205				143				(62	)			(30	)

Research and development tax credits recoverable was reduced by $62,000 from $205,000 for the three months ended September 30, 2009 to $143,000 for the three months ended September 30, 2010. This was due to a reduction in qualifying headcount as the level of tax credits recoverable is linked directly to qualifying research and development expenditure incurred in any one year, but restricted to payroll taxes paid by us in the United Kingdom in that same year.

The future

We expect to continue to be eligible to receive United Kingdom research and development tax credits for the foreseeable future and will elect to do so. However, as a result of the reduction in employee numbers the amount of payroll taxes payable in future periods will be lower than in previous periods, restricting available research and development tax credits to that lower amount.

Nine Months Ended September 30, 2009 and 2010

Revenues

The following table summarizes the components of our revenues for the nine months ended September 30, 2009 and 2010:

		Nine months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Collaboration and research and development revenue			—				100				100				100
Product revenue			688				432				(256	)			(37	)
Grant revenue			36				16				(20	)			(56	)
Total revenue			724				548				(176	)			(24	)

Collaboration and research and development revenue in 2010 is derived from an agreement with a pharmaceutical company under which we provide one of our compounds for evaluation in the field of eye care.

Grant revenue is recognized as we incur and pay for qualifying costs and services under the applicable grant. Grant revenue is primarily derived from various United Kingdom government grant awards.

Product revenue is derived from the sale of Xclair^® Cream, Numoisyn^® Liquid and Numoisyn^® Lozenges. During the nine months ended September 30, 2009 and 2010, we recorded sales of $0.7 million and $0.4 million, respectively. The decrease in product revenue for the nine months ended September 30, 2010 was due to a higher than anticipated amount of product returns approximating of $0.2 million, related to expiring product with a two-year shelf-life previously sold into the marketplace. Additionally, we have increased our provision for product returns and fully reserving against, and therefore not recognized sales, of product shipped which is approaching six-month expiration date.

Cost of goods sold

		Nine months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Cost of goods sold			472				310				(162	)			34

Total cost of sales represented 69% and 72% of product revenue for the nine months ended September 30, 2009 and 2010, respectively. The reduction in the cost of sales in 2010 was due to the lower product revenues as a consequence of product returns as discussed above under Revenues for the nine months ended September 30, 2010.

Research and development expenses

The following table provides information with respect to our research and development expenditure for the nine months ended September 30, 2009 and 2010:

		Nine months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Sapacitabine			4,980				3,992				(988	)			20
Seliciclib			(133	)			121				254				(191	)
CYC116			160				22				(138	)			86
Other research and development costs			2,167				833				(1,334	)			62
Total research and development expenses			7,174				4,968				(2,206	)			31

Total research and development expenses represented 49% and 37% of our operating expenses for the nine months ended September 30, 2009 and 2010, respectively.

Research and development expenditures decreased by $2.2 million from $7.2 million for the nine months ended September 30, 2009 to $5.0 million for the nine months ended September 30, 2010. Sapacitabine costs reduced by $1.0 million from $5.0 million for the nine months ended September 30, 2009 to $4.0 million for the nine months ended September 30, 2010 primarily due to manufacturing scale up costs incurred during 2009 which were not required in 2010. Other research and development expenses decreased by $1.3 million for the nine months ended September 30, 2010 as compared to the same period in 2009 due to the reduction in headcount in 2009 and the concentration of our efforts on our lead program. Seliciclib costs increased $0.2 million as there was a net credit for the seliciclib program of $0.1 million for the nine months ending September 30, 2009 due to the lower than anticipated clinical trial costs of the APPRAISE trial compared to an expense of $0.1 million for the nine months ended September 30, 2010. The CYC116 program expenditures were lower by $0.1 million during the nine months ended September 30, 2010 as compared to the same period in 2009 as this program is not currently being progressed.

Selling, general and administrative expenses

Selling, general and administrative expenses include costs for sales and marketing and administrative personnel, legal and other professional expenses and general corporate expenses. The following table summarizes the selling, general and administrative expenses for the nine months ended September 30, 2009 and 2010:

		Nine months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Total selling, general and administrative expenses			6,703				8,103				1,400				21

Total selling, general and administrative expenses represented 46% and 61% of our operating expenses for each of the nine months ended September 30, 2009 and 2010, respectively.

Our selling, general and administrative expenditure increased by $1.4 million to $8.1 million for the nine months ended September 30, 2010 from $6.7 million for the nine months ended September 30, 2009. The increase of $1.4 million in expenses was primarily attributable to an increase in professional and consultancy costs of $1.3 million and stock-based compensation charges of $0.8 million which was offset by decreases in employment costs, due to the reduction in headcount during 2009 of $0.5 million and patent costs of $0.2 million.

Restructuring charge

As of September 30, 2010, the restructuring liability associated with exiting the Bothell facility was $0.2 million accounting for the estimated fair value of the remaining lease payments, net of estimated sub-lease income. The restructuring liability is subject to a variety of assumptions and estimates. We review these assumptions and estimates on a quarterly basis and will adjust the accrual if necessary. There was no change in the estimate for the nine months ended September 30, 2010.

For the nine months ended September 30, 2010, we recorded accretion expense associated with the Bothell restructuring lease of $0.1 million on the consolidated statement of operations as interest expense. A final $2,000 of accretion expense will be recognized over the remaining life of the lease to December 2010.

As a result of the continual review of our operating plan, in June 2009 additional actions were further implemented to the restructuring plan announced in September 2008. These actions reduced the workforce across all locations by an additional 26 people making a total reduction of 51 (or 63% of the workforce) since September 2008. An additional restructuring accrual of $0.4 million was recorded in connection with the severance payments liability during the second quarter of 2009.

Other income (expense)

Other income (expense) is comprised of the change in valuation of the derivative, change in value of liability classified warrants, interest income and interest expense. The following table summarizes the other income (expense) for the nine months ended September 30, 2009 and 2010:

		Nine months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Payment under guarantee			(1,652	)			—				1,652				100
Change in valuation of warrants			(195	)			(443	)			(248	)			(127	)
Foreign exchange gains/(losses)			(129	)			(63	)			66				51
Interest income			94				24				(70	)			(74	)
Interest expense			(156	)			(40	)			116				74
Total other income (expense)			(2,038	)			(522	)			1,516				74

The payment under guarantee was made to Scottish Enterprise, as a result of a reduction in the Company’s research operations.

The change in valuation of warrants relates to the issue of warrants to purchase shares of our common stock under the registered direct financing completed in February 2007. The warrants issued to the investors meet the requirements of and are being accounted for as a liability in accordance with ASC 815. The value of the warrants is being marked to market each reporting period as a derivative gain or loss until exercised or expiration. For the nine months ended September 30, 2009 and 2010, we recognized the change in the value of warrants of approximately $0.2 million and $0.4 million, respectively as an expense within other income (expense) on the condensed consolidated statement of operations.

Interest income decreased by approximately $70,000 from $94,000 for the nine months ended September 30, 2009 to approximately $24,000 for the nine months ended September 30, 2010. The decrease is primarily attributable to lower average balances of cash and cash equivalents and short-term investments in 2010 as compared to 2009.

Interest expense decreased by approximately $116,000 from $156,000 for the nine months ended September 30, 2009 to approximately $40,000 for the nine months ended September 30, 2010. In May 2010, we settled a note payable due to a supplier earlier than the contractual terms required, resulting in a reduction of interest payable

Income tax benefit

Credit is taken for research and development tax credits, which are claimed from HMRC, in respect of qualifying research and development costs incurred.

The following table summarizes research and development tax credits for the nine months ended September 30, 2009 and 2010:

		Nine months ended September 30,
		2009				2010				Difference				Difference
		($000s)												%
Total income tax benefit			796				506				(290	)			(36	)

Research and development tax credits recoverable decreased by $0.3 million from $0.8 million for the nine months ended September 30, 2009 to $0.5 million for the nine-months ended September 30, 2010. The decrease was a reflection of decreased income taxes available for recovery as a consequence of the lower eligible research and development payroll expenses in 2010.

Liquidity and Capital Resources

The following is a summary of our key liquidity measures at December 31, 2009 and September 30, 2010:

		December 31,				September 30,								%
		2009				2010				Difference				Difference
		($000s)
Cash and cash equivalents		$	11,493				18,482				6,989				61
Current assets			13,369				19,683				6,314				47
Current liabilities			9,822				7,965				(1,857	)			(19	)
Working capital			3,547				11,718				8,171				230

At September 30, 2010, we had cash and cash equivalents of $18.5 million as compared to $11.5 million at December 31, 2009. The increased balance at September 30, 2010 was primarily due to the completion of two registered direct offerings in January 2010 for net proceeds of approximately $11.9 million, the issuing of 2.8 million common shares for approximately $4.9 million as part of the committed equity financing facility, or CEFF, with Kingsbridge Capital Limited, or Kingsbridge and the exercise of options and warrants totaling $2.6 million during the first three quarters of 2010. Since our inception, we have not generated any significant revenue and have relied primarily on the proceeds from sales of equity and preferred securities to finance our operations and internal growth. Additional funding has come through interest on investments, licensing revenue, government grants and research and development tax credits. We have incurred significant losses since our inception. As of September 30, 2010, we had a deficit accumulated during the development stage of $238.0 million. We believe that existing funds, along with the $15.2 million in gross proceeds raised through a private placement of our securities in October 2010, together with cash generated from operations are sufficient to satisfy our planned working capital, capital expenditures, debt service and other financial commitments for at least the next twelve months. Current business and capital market risks could have a detrimental affect on the availability of sources of funding and our ability to access them in the future which may delay or impede our progress of advancing our drugs currently in the clinic to approval by the FDA for commercialization.

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

Cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2009 and 2010, is summarized as follows:

		Nine months ended September 30,
		2009				2010
		($000s)
Net cash used in operating activities			(12,618	)			(12,302	)
Net cash provided by investing activities			1,502				27
Net cash provided by financing activities			2,560				19,282

Operating activities

Net cash used in operating activities was $12.6 million and $12.3 million for the nine months ended September 30, 2009 and 2010, respectively. Net cash used in operating activities during the nine months ended September 30, 2010 of $12.3 million resulted from our net loss of $12.8 million, adjusted for material non-cash activities comprising change in valuation of liability-classified warrants, depreciation and amortization and non-cash stock based compensation expense, amounting to $2.2 million and a net increase in working capital of $1.7 million due to a decrease in prepaid expenses combined with a decrease in accounts payable and other current liabilities.

Investing activities

Net cash provided by investing activities for the nine months ended September 30, 2009 and 2010 was $1.5 million and approximately $27,000, respectively. During 2009 and 2010, our cash management strategy has been to conserve cash and as such we have invested money in the lowest risk securities or cash deposits.

Financing activities

For the nine months ended September 30, 2010, net cash provided by financing activities was $19.3 million. We completed two registered direct offerings in January 2010 for net proceeds of approximately $11.9 million, drew down from the Kingsbridge CEFF totaling approximately $4.9 million and had investors exercising warrants totaling $2.7 million.

Operating Capital and Capital Expenditure Requirements

We expect to continue to incur substantial operating losses in the future. While we have generated modest product revenues from ALIGN product sales from October 2007 through September 30, 2010, we cannot guarantee that we will generate any significant product revenues until a product candidate has been approved by the FDA or similar regulatory agencies in other countries and successfully commercialized.

We currently anticipate that our cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months. We can not be certain that any of our programs will be successful or that we will be able to raise sufficient funds to complete the development and commercialize any of our product candidates currently in development, should they succeed. Additionally, we plan to continue to evaluate in-licensing and acquisition opportunities to gain access to new drugs or drug targets that would fit with our strategy. Any such transaction would likely increase our funding needs in the future.

Our future funding requirements will depend on many factors, including but not limited to:

•

the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;

•

the costs associated with establishing manufacturing and commercialization capabilities;

•

the costs of acquiring or investing in businesses, product candidates and technologies;