| XCYTE THERAPIES INC ITEM 1A RISK FACTORS Important Factors That May Affect Our Business, Results of Operations and Stock Price You should carefully consider the risks described below, together with all of the other information included in this annual report on Form 10-K and the information incorporated by reference herein |
| If we do not effectively address the risks we face, our business will suffer and we may never achieve or sustain profitability |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ” This annual report on Form 10-K also contains forward-looking statements that involve risks and uncertainties |
| Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this annual report on Form 10-K RISK FACTORS Risks Related to the Stock Purchase Failure to complete the Stock Purchase may result in Xcyte paying a termination fee to Cyclacel and could harm Xcyte’s common stock price and future business and operations |
| If the Stock Purchase is not completed, Xcyte may be subject to the following risks: • if the Stock Purchase Agreement is terminated under certain circumstances, Xcyte will be required to pay the other party a termination fee of dlra100cmam000; • the price of Xcyte stock may decline to the extent that the current market price of Xcyte stock reflects a market assumption that the Stock Purchase will be completed; and • costs related to the Stock Purchase, such as legal, accounting and certain financial advisory fees, must be paid even if the Stock Purchase is not completed |
| In addition, if the Stock Purchase Agreement is terminated and Xcyte’s board of directors determines to seek another business combination, there can be no assurance that it will be able to find a partner willing to pay an equivalent or more attractive price than the price to be paid by each party in the Stock Purchase |
| 7 ______________________________________________________________________ [33]Table of Contents The Stock Purchase may be completed even though material adverse changes may result from the announcement of the Stock Purchase, industry-wide changes and other causes |
| In general, either party can refuse to complete the Stock Purchase if there is a material adverse change affecting the other party between the date of signing (December 15, 2005) and the closing |
| However, certain types of changes will not prevent the Stock Purchase from being completed, even if they would have a material adverse effect on Xcyte, including: • changes resulting from general economic conditions or conditions generally affecting the industry in which the respective company operates, except in either case to the extent the respective company is materially disproportionately adversely affected thereby relative to other similarly situated businesses; • changes due to the announcement of the execution of the Stock Purchase Agreement or the completion of the transactions contemplated by the Stock Purchase Agreement; • changes resulting from or relating to any change in accounting requirements or principles or any change in applicable laws, rules or regulations or the interpretation thereof; • changes resulting from a change in the stock price or trading volume of Xcyte excluding any underlying effect that may have caused such change; or • changes resulting from the delisting or threatened or potential delisting of Xcyte common stock or preferred stock from the Nasdaq Stock Market |
| If adverse changes occur but Xcyte must still complete the Stock Purchase, Xcyte’s stock price may suffer |
| This in turn may reduce the value of the Stock Purchase to the stockholders of Xcyte |
| The market price of Xcyte common stock may decline as a result of the Stock Purchase for a number of reasons including if: • Xcyte does not achieve the perceived benefits of the Stock Purchase as rapidly or to the extent anticipated by financial or industry analysts; • the effect of the Stock Purchase on Xcyte’s business and prospects is not consistent with the expectations of financial or industry analysts; or • investors react negatively to the effect on Xcyte’s business and prospects from the Stock Purchase |
| Xcyte stockholders may not realize a benefit from the Stock Purchase commensurate with the ownership dilution they will experience in connection with the Stock Purchase |
| If the combined company is unable to realize the strategic and financial benefits currently anticipated from the Stock Purchase, Xcyte will have experienced substantial dilution of their ownership interest without receiving any commensurate benefit |
| Failure to complete the Stock Purchase may result in the liquidation of the Company and the common stock may have no value |
| If the Stock Purchase is not completed, it may be difficult to enter into another business combination, for several reasons, including (i) Xcyte will have a reduced cash position over time; (ii) it is likely that Xcyte’s common stock will be delisted from the NASDAQ National Market; and (iii) Xcyte may not have the management personnel to execute another transaction |
| If the Stock Purchase is not completed and Xcyte cannot expeditiously achieve another business combination transaction, then Xcyte would likely be liquidated |
| If liquidation were to occur, Xcyte’s common stock holders would likely receive little or no distribution because the holders of preferred stock of Xcyte would have preference to the cash available for distribution to equity holders after payment of Xcyte’s creditors, which amount of available cash would likely not exceed the preference amount of Xcyte’s convertible preferred stock |
| Risks related to Xcyte’s Business |
| The attempted development of products using Xcyte’s Xcellerate Technology was Xcyte’s only potential product line |
| Xcyte has not successfully developed any product line with its Xcellerate Technology |
| Xcyte plans to sell all rights to its Xcellerate Technology and all related assets to Invitrogen in connection with the Asset Purchase Agreement described above |
| Following the Stock Purchase Xcyte plans to conduct the business that is now being conducted by Cyclacel |
| Xcyte has no plans to pursue any other product line other than pursuant to the acquisition of Cyclacel pursuant to the Stock Purchase |
| Xcyte may not be able to retain existing personnel |
| Xcyte’s remaining staff, as of January 23, 2006 consisted of five employees |
| The uncertainty of the outcome of Xcyte’s review of strategic alternatives, workforce reductions and the volatility in its stock price may create anxiety and uncertainty, which may adversely affect employee morale and cause Xcyte to lose employees whom it would prefer to retain |
| To the extent that Xcyte is unable to retain its existing personnel, its business and ability to pursue strategic alternatives may suffer |
| In addition, this workforce reduction may subject Xcyte to the risk of litigation, which could result in substantial costs and could divert management’s time and attention away from business operations |
| Xcyte expects to continue to incur substantial losses and may never achieve profitability |
| Xcyte has incurred significant operating losses since it began operations in 1996, including net losses of approximately dlra29dtta4 million for the year ended December 31, 2005 and Xcyte may never become profitable |
| As of December 31, 2005, Xcyte had an accumulated deficit since inception of approximately dlra155dtta6 million |
| These losses have resulted principally from costs incurred in Xcyte’s research and development programs and from its general and administrative expenses |
| To date, Xcyte has derived no revenues from product sales or royalties |
| Xcyte does not expect to have any product sales or royalty revenue in the foreseeable future |
| Xcyte’s operating losses have been increasing during the past several years and may increase significantly in the future |
| Xcyte also may be required to recognize additional losses based upon changes in the fair value of its derivative liability, which resulted from the dividend make-whole payment feature of its convertible preferred stock |
| These losses, among other things, have had and will continue to have an adverse effect on Xcyte’s stockholders’ equity and working capital |
| Xcyte is unable to predict when it may become profitable, if at all |
| If Xcyte is unable to achieve and then maintain profitability, the market value of its common stock and convertible preferred stock will likely decline |
| 8 ______________________________________________________________________ [34]Table of Contents Xcyte may be unable to maintain its listing on Nasdaq, which could cause Xcyte’s stock price to fall and decrease the liquidity of its stock |
| Xcyte common stock and convertible preferred stock are currently traded on the Nasdaq National Market, which has compliance requirements for continued listing, including a requirement that Xcyte common stock and convertible preferred stock each have a minimum bid price of dlra1dtta00 per share |
| On June 6, 2005, Xcyte received a notice from the Nasdaq Stock Market that for 30 consecutive trading days the bid price of its common stock had closed below the minimum dlra1dtta00 per share requirement and, as a result, its common stock no longer complied with Nasdaq ’s continued listing criteria |
| The letter stated that Xcyte would be provided with 180 calendar days, or until December 5, 2005, to regain compliance |
| Xcyte common stock did not regain compliance with this requirement by December 5, 2005, and Xcyte received a notice on December 5, 2005 from the Nasdaq Stock Market that its common stock would be delisted |
| Xcyte appealed Nasdaq’s determination and appeared before a Nasdaq Listing Qualifications Panel on January 12, 2006 |
| On February 7, 2006, the Nasdaq Listing Qualifications Panel granted a continuation of Xcyte’s listing on the Nasdaq National Market subject to certain conditions, including the consummation of the Stock Purchase and Nasdaq’s approval of an initial listing application for the shares of the combined company pursuant to Nasdaq’s “reverse merger” rules on or before April 12, 2006 (discussed below) |
| On December 28, 2005, the Nasdaq Stock Market advised Xcyte that it considers the Stock Purchase to be a “reverse merger” under Nasdaq’s Marketplace Rules |
| Based on this conclusion, Nasdaq advised Xcyte that upon consummation of the Stock Purchase, Xcyte’s common stock and convertible preferred stock will not be permitted to continue to trade on the Nasdaq National Market unless a new initial listing application for the stock of the combined company is filed and approved before consummation of the Stock Purchase |
| Cyclacel Pharmaceuticals, Inc |
| (as Xcyte will be renamed following the Stock Purchase) has filed an initial listing application for the listing of Xcyte’s common stock and convertible preferred stock following the Stock Purchase on the Nasdaq National Market under the trading symbols “CYCC” and “CYCCP”, respectively |
| This initial listing application has not yet been approved as to either class of stock and the application is subject to separate consideration with respect to each class of Xcyte stock |
| In order for such application to be approved with respect to either the common stock or the convertible preferred stock, such class must meet all of the initial inclusion criteria for initial listing on the Nasdaq National Market, including a minimum closing bid price of dlra5dtta00 per share |
| As of March 22, 2006, the bid price for both Xcyte’s common stock and Xcyte’s convertible preferred stock were below the minimum bid price of dlra5dtta00 per share |
| While Xcyte is hopeful that following the anticipated one for ten common stock reverse stock split approved by Xcyte’s stockholders on March 16, 2006, the bid price for Xcyte’s common stock may rise above the dlra5dtta00 minimum bid price per share, Xcyte cannot give any assurance that this will occur |
| Moreover, Xcyte cannot anticipate whether or not the minimum bid price for Xcyte’s convertible preferred stock will rise above dlra5dtta00 per share prior to the closing of the Stock Purchase |
| If the Nasdaq does not approve the listing of Xcyte’s common stock or convertible preferred stock for trading on the Nasdaq National Market following the Stock Purchase, upon closing of the Stock Purchase the class (or classes) of Xcyte’s stock for which such application is not approved will no longer be listed for trading on the Nasdaq National Market |
| In such case, Xcyte may seek to have the applicable shares of common stock or convertible preferred stock listed for trading on the Nasdaq Capital Market |
| Xcyte cannot assure you that it would be able to obtain listing for its shares of common stock or convertible preferred following the Stock Purchase on the Nasdaq National Market or the Nasdaq Capital Market or that it will be able on an ongoing basis to meet the maintenance requirements thereof |
| If Xcyte’s shares of stock were to be delisted from trading on the Nasdaq National Market and were neither relisted thereon nor listed for trading on the Nasdaq Capital Market, trading, if any, in Xcyte’s stock may continue to be conducted on the OTC Bulletin Board or in a non-Nasdaq over-the-counter market, such as the “pink sheets |
| ” Delisting of Xcyte’s shares of common stock would result in limited release of the market price of those shares of common stock and limited analyst coverage and could restrict investors’ interest in Xcyte’s securities |
| Also, a delisting could materially adversely affect the trading market and prices for Xcyte’s stock and its ability to issue additional securities or to secure additional financing |
| In addition, if Xcyte’s stock were not listed and the trading price of its shares of common stock was less than dlra5 per share, Xcyte’s shares of common stock could be subject to Rule 15g-9 under the Securities Exchange Act of 1934 which, among other things, requires that broker/dealers satisfy special sales practice requirements, including making individualized written suitability determinations and receiving a purchaser’s written consent prior to any transaction |
| In such case, Xcyte’s securities could also be deemed to be a “penny stock” under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure in connection with trades in those shares of common stock, including the delivery of a disclosure schedule explaining the nature and risks of the penny stock market |
| Such requirements could severely limit the liquidity of Xcyte’s securities |
| Xcyte may have limited ability to pay cash dividends on the convertible preferred stock |
| Delaware law may limit Xcyte’s ability to pay cash dividends on the convertible preferred stock |
| Under Delaware law, cash dividends on Xcyte’s capital stock may only be paid from “surplus” or, if there is no “surplus,” from the corporation’s net profits for the current or preceding fiscal year |
| Delaware law defines “surplus” as the amount by which the total assets of a corporation, after subtracting its total liabilities, exceed the corporation’s capital, as determined by its board of directors |
| Since Xcyte is not profitable, its ability to pay cash dividends will require the availability of adequate surplus |
| Even if adequate surplus is available to pay cash dividends on the convertible preferred stock, Xcyte may not have sufficient cash to pay dividends on the convertible preferred stock |
| If that was to happen, holders of preferred stock would be granted certain additional rights until such dividends were repaid |
| There are risks inherent in Xcyte’s past business operations that may subject it to potential product liability suits and other claims, which may require it to engage in expensive and time-consuming litigation or pay substantial damages |
| Xcyte’s past business operations expose it to product liability risks, which are inherent in the testing, manufacturing, marketing and sale of biopharmaceutical products and these risks will continue to effect Xcyte after the Stock Purchase |
| Even if Xcyte does not decide to resume the clinical development of its products, Xcyte faces a risk of clinical trial liability claims in the event that the prior use, or misuse, of its product candidates during clinical trials resulted in personal injury or death |
| An individual may bring a product liability claim against Xcyte if Xcellerated T Cells cause, or merely appear to have caused, an injury |
| Xcyte currently has clinical trial insurance that covers its clinical trials up to dlra5dtta0 million per occurrence with a dlra5dtta0 million aggregate limit |
| However, due to factors outside of Xcyte’s control, including the risks discussed above as well as conditions in the relevant insurance markets, Xcyte may not be able to renew such coverage on acceptable terms, if at all |
| Furthermore, even if Xcyte secures coverage, it may not be able to obtain policy limits adequate to satisfy any liability that may arise |
| If a successful product liability or other claim or series of claims is brought against Xcyte for uninsured liabilities or in excess of insured liabilities, its assets may not be sufficient to cover these claims and its business operations could suffer |
| If Xcyte’s principal stockholders, executive officers and directors choose to act together, they may be able to control its management and operations, acting in their best interests and not necessarily those of other stockholders |
| Xcyte’s executive officers, directors and principal stockholders, and entities affiliated with them, beneficially own a significant percentage of its common stock and convertible preferred stock |
| This significant concentration of share ownership may adversely affect the trading price of Xcyte common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders |
| These stockholders, acting together, have the ability to exert substantial influence over all matters requiring approval by Xcyte’s stockholders, including the election and removal of directors and any proposed Stock Purchase, consolidation or sale of all or substantially all of Xcyte’s assets |
| In addition, they could dictate the management of Xcyte’s business and affairs |
| This concentration of ownership could have the effect of delaying, deferring or preventing a change in control of Xcyte or impeding a stock purchase, consolidation, takeover or other business combination that could be favorable to you |
| Since Xcyte convertible preferred stock has limited voting rights prior to conversion, holders of its convertible preferred stock will have little or no ability to control the outcome of a stockholder vote, except under certain circumstances where a class vote of Xcyte convertible preferred stock will be required, 9 ______________________________________________________________________ [35]Table of Contents including, among others, upon certain amendments to the Company’s certificate of incorporation or bylaws or upon a share exchange, stock purchase or consolidation of the Company unless Xcyte’s shares of convertible preferred stock remain outstanding and unaffected by such transaction or convert into similar preferred stock of the surviving entity pursuant to such transaction |
| Xcyte will soon be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal control attestation and any inability to do so may negatively impact the report on its financial statements |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires Xcyte’s management to assess the effectiveness of its internal controls over financial reporting and include an assertion in Xcyte’s annual report as to the effectiveness of its controls beginning the year ending December 31, 2007, assuming Xcyte remains a non-accelerated filer as defined per SEC regulations |
| Subsequently, Xcyte’s independent registered public accounting firm will be required to attest to whether Xcyte’s assessment of the effectiveness of its internal control over financial reporting is fairly stated in all material respects and separately report on whether it believes Xcyte maintained, in all material respects, effective internal control over financial reporting for the year ending December 31, 2007 |
| Due to the recent departure of Xcyte’s Associate Director of SEC Reporting and its Controller, as well as any difficulties Xcyte may have in retaining its current personnel and the transition to new employees following the Stock Purchase, Xcyte cannot assure you that it will be able to identify deficiencies in its internal controls, remediate such deficiencies in a timely manner or comply with the Section 404 disclosure requirements for the year ending December 31, 2007 |
| If Xcyte identifies deficiencies in its existing internal controls and are not able to remediate such deficiencies in a timely fashion or otherwise comply with the Section 404 disclosure requirements for the year ending December 31, 2007, Xcyte will not be able to give assurance regarding the effectiveness of its internal controls and the report on its financial statements provided by its independent auditors may be negatively impacted |
| Xcyte’s common and convertible preferred stock may experience extreme price and volume fluctuations, which could lead to costly litigation for Xcyte and make an investment in Xcyte less appealing |
| The market price of Xcyte’s common and convertible preferred stock may fluctuate substantially due to a variety of factors, including: • the course of action that Xcyte takes with respect to the review of its strategic alternatives; • additions to or departures of Xcyte’s key personnel; • announcements of technological innovations or new products or services by Xcyte or its competitors; • media reports and publications about immunotherapy; • announcements concerning Xcyte’s competitors or the biotechnology industry in general; • new regulatory pronouncements and changes in regulatory guidelines; • general and industry-specific economic conditions; • changes in financial estimates or recommendations by securities analysts; • variations in Xcyte’s quarterly results; • announcements about Xcyte’s collaborators or licensors; and • changes in accounting principles |
| The market prices of the securities of biotechnology companies, particularly companies without product revenues and earnings, have been highly volatile and are likely to remain highly volatile in the future |
| This volatility has often been unrelated to the performance of particular companies |
| In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation |
| Moreover, market prices for stocks of biotechnology-related and technology companies frequently reach levels that bear no relationship to the performance of these companies |
| These market prices generally are not sustainable and are highly volatile |
| Whether or not meritorious, litigation brought against Xcyte could result in substantial costs, divert Xcyte’s management’s attention and resources and harm Xcyte’s financial condition and results of operations |
| Xcyte’s certificate of incorporation and bylaws and certain provisions of Delaware law may delay or prevent a change in Xcyte’s management and make it more difficult for a third party to acquire Xcyte |
| Xcyte’s certificate of incorporation and bylaws contain provisions that could delay or prevent a change in its board of directors and management teams |
| Some of these provisions: • authorize the issuance of preferred stock that can be created and issued by the board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of Xcyte common stock; • provide for the board of directors to be divided into three classes; and • require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent |
| In addition, because Xcyte is incorporated in Delaware, Xcyte is governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of large stockholders to complete a business combination with, or acquisition of Xcyte |
| These provisions may prevent a business combination or acquisition that would be attractive to stockholders and could limit the price that investors would be willing to pay in the future for Xcyte’s stock |
| These provisions also make it more difficult for Xcyte’s stockholders to replace members of its board of directors |
| Because Xcyte’s board of directors is responsible for appointing the members of its management team, these provisions could in turn affect any attempt to replace Xcyte’s current management team |
| Additionally, these provisions may prevent an acquisition that would be attractive to stockholders and could limit the price that investors would be willing to pay in the future for Xcyte common stock |
| The future sale of Xcyte’s common and convertible preferred stock, and future issuances of Xcyte common stock upon conversion of its convertible preferred stock and upon the payment of make-whole dividends, if any, could negatively affect Xcyte’s stock price |
| If Xcyte’s common or convertible preferred stockholders sell substantial amounts of its stock in the public market, or the market perceives that such sales may occur, the market price of Xcyte’s common and convertible preferred stock could fall |
| In addition, if Xcyte exercises its rights to pay make-whole dividends in common stock rather than in cash upon conversion of its convertible preferred stock to common stock, then the sale of such shares of common stock or the perception that such sales may occur could cause the market price of Xcyte’s stock to fall |
| Additionally, after Xcyte’s convertible preferred stock offering, the holders of its convertible preferred stock had the right to convert each share of convertible 10 ______________________________________________________________________ [36]Table of Contents preferred stock into approximately 4dtta2553 shares of its common stock |
| Such conversion rate is subject to certain antidilution adjustments that, upon the occurrence of certain events, will increase the number of shares of common stock that each holder of convertible preferred stock will receive upon conversion into common stock |
| Such antidilution price adjustments may apply in the case of any strategic alternative that Xcyte pursues which may result in further dilution to the holders of outstanding common stock |
| The conversion of Xcyte convertible preferred stock into common stock and the payment of any make-whole dividends in shares of common stock in lieu of cash, may result in substantial dilution to the interests of Xcyte’s holders of common stock |
| After Xcyte convertible preferred stock offering, according to the terms of Xcyte’s investors rights agreement, the holders of approximately 9dtta0 million shares of Xcyte common stock and warrants had rights, subject to some conditions, to require Xcyte to file registration statements covering their shares of common stock or to include their shares of common stock in registration statements that Xcyte may file for itself or other stockholders |
| Furthermore, if Xcyte were to include in a company-initiated registration statement shares of common stock held by those holders pursuant to the exercise of their registration rights, those sales could impair its ability to raise needed capital by depressing the price at which it could sell its common stock |
| If Xcyte exchanges the convertible preferred stock for debentures, the exchange will be taxable but Xcyte will not provide any cash to pay any tax liability that any convertible preferred stockholder may incur |
| An exchange of convertible preferred stock for debentures, as well as any dividend make-whole or interest make-whole payments paid in Xcyte common stock, will be taxable events for US federal income tax purposes, which may result in tax liability for the holder of convertible preferred stock without any corresponding receipt of cash by the holder |
| In addition, the debentures may be treated as having original issue discount, a portion of which would generally be required to be included in the holder’s gross income even though the cash to which such income is attributable would not be received until maturity or redemption of the debenture |
| Xcyte will not distribute any cash to you to pay these potential tax liabilities |
| If Xcyte automatically converts the convertible preferred stock, there is a substantial risk of fluctuation in the price of Xcyte common stock from the date it elects to automatically convert to the conversion date |
| Xcyte may elect to automatically convert the convertible preferred stock on or prior to maturity if Xcyte common stock price has exceeded 150prca of the conversion price for at least 20 trading days during a 30-day trading period ending within five trading days prior to the notice of automatic conversion |
| You should be aware that there is a risk of fluctuation in the price of Xcyte common stock between the time when it may first elect to automatically convert the preferred and the automatic conversion date |
| Xcyte does not intend to pay cash dividends on its common stock in the foreseeable future |
| Xcyte does not anticipate paying cash dividends on its common stock in the foreseeable future |
| Any payment of cash dividends will depend on Xcyte’s financial condition, results of operations, capital requirements, the outcome of the review of Xcyte’s strategic alternatives and other factors and will be at the discretion of Xcyte’s board of directors |
| Accordingly, investors will have to rely on capital appreciation, if any, to earn a return on their investment in Xcyte common stock |
| Furthermore, Xcyte may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends |