12 Stock-Based Compensation Arrangements

All stock-based compensation information presented gives effect to the reverse stock split, which occurred on August 24, 2012.

ASC 718 requires compensation expense associated with share-based awards to be recognized over the requisite service period, which for the Company is the period between the grant date and the date the award vests or becomes exercisable. Most of the awards granted by the Company (and still outstanding), vest ratably over four years, with ¼ of the award vesting one year from the date of grant and 1/48 of the award granted vesting each month thereafter. Annual awards granted in December 2010 vest 1/48 of the award each month after the grant date. Certain awards made to executive officers vest over three to five years, depending on the terms of their employment with the Company.

The Company recognizes all share-based awards issued after the adoption of ASC 718 under the straight-line attribution method. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company evaluates its forfeiture assumptions quarterly and the expected forfeiture rate is adjusted when necessary. Ultimately, the actual expense recognized over the vesting period is based on only those shares that vest.

Stock based compensation has been reported within expense line items on the consolidated statement of operations for 2010, 2011 and 2012 as shown in the following table:

	Year ended December 31, 2010	Year ended December 31, 2011	Year ended December 31, 2012
	$000	$000	$000
Research and development	351	171	71
General and administrative	1,344	669	266
(Loss) income from discontinued operations, net of tax	51	42	43
Stock-based compensation costs before income taxes	1,746	882	380

2006 Plans

On March 16, 2006, Xcyte stockholders approved the adoption of the 2006 Plans, under which Cyclacel, may make equity incentive grants to its officers, employees, directors and consultants. At the Company’s annual shareholder meeting on May 23, 2012, the stockholders approved and amended the number of shares reserved under the 2006 Plan to 10,000,000 shares of the Company’s common stock, up from 5,200,000 shares. Stock option awards granted under the 2006 Plan have a maximum life of 10 years and generally vest over a four-year period from the date of grant.

The Company granted approximately 33,571 options to employees and directors with a grant date fair value of approximately $0.1 million, of which approximately $12,000 has been recorded as compensation cost in the consolidated statement of operations for the year ended December 31, 2012. During 2011, the Company granted approximately 28,500 options to employees and directors with a grant date fair value of approximately $0.2 million, of which approximately $24,000 has been recorded as compensation cost for the year ended December 31, 2011. During 2010, the Company granted approximately 0.1 million options to employees and directors with a grant date fair value of approximately $0.6 million, of which approximately $50,000 was expensed during the year ended December 31, 2010. The weighted average grant-date fair values of options granted during the year ended December 31, 2012, 2011, and 2010 were $2.52, $8.05, and $9.80, respectively.

As of December 31, 2012, the total remaining unrecognized compensation cost related to the non-vested stock options amounted to approximately $0.4 million, which will be amortized over the weighted-average remaining requisite service period of 2.27 years.

During the years ended December 31, 2010, 2011 and 2012, the Company did not settle any equity instruments with cash.

The Company received $0.1 million from the exercise of 33,351 options during 2012. The total intrinsic value of options exercised during 2012 was approximately $0.1 million. The Company received $3,000 from the exercise of 948 stock options during 2011. The total intrinsic value of options exercised during 2011 was approximately $7,000. The Company received approximately $0.1 million from the exercise of 24,901 stock options during 2010. The total intrinsic value of options exercised during 2010 was approximately $0.2 million. No income tax benefits were recorded for the years ended December 2010, 2011 and 2012 because ASC 718 prohibits recognition of tax benefits for exercised stock options until such benefits are realized. The Company was not able to benefit from the deduction for exercised stock options for the years ended December 31, 2010, 2011 and 2012 because the Company incurred tax losses in each of those years.

Outstanding Options

A summary of the share option activity and related information is as follows:

Cyclacel Pharmaceuticals, Inc.	Number of options outstanding		Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate intrinsic value
Options outstanding at December 31, 2010	498,562		$	27.72	7.22	$	938
Granted	28,500		$	10.64
Exercised	(948	)	$	2.87
Cancelled/forfeited	(23,865	)	$	40.53
Options outstanding at December 31, 2011	502,249		$	26.11	6.44	$	140
Granted	33,571		$	3.29
Exercised	(33,351	)	$	3.09
Cancelled/forfeited	(39,446	)	$	20.21
Options outstanding at December 31, 2012	463,023		$	26.61	5.58	347
Unvested at December 31, 2011	69,781		$	8.83	8.44	68
Vested and exercisable at December 31, 2012	393,242		$	29.77	5.07	279

The following table summarizes information about options outstanding at December 31, 2012:

Exercise price ($)	Number outstanding	Weighted Average remaining contractual life	Number exercisable
2.03 — 13.86	196,078	7.24	133,108
15.05 — 34.62	44,618	6.11	37,807
36.63 — 40.67	72,581	4.81	72,581
43.75 — 48.65	123,353	3.56	123,353
54.60 — 105.00	26,393	3.88	26,393
	463,023		393,242

The fair value of the stock options granted is calculated using the Black-Scholes option-pricing model as prescribed by ASC 718 using the following assumptions:

	Year ended December 31, 2010	Year ended December 31, 2011	Year ended December 31, 2012
Expected term (years)	5 — 6	5 — 6	6
Risk free interest rate	1.64 — 2.96%	1.47 — 2.29%	0.95%
Volatility	90 — 102%	93 — 99%	98%
Expected dividend yield over expected term	0.00%	0.00%	0.00%
Resulting weighted average grant date fair value	$9.80	$8.05	$2.52

The expected term assumption was estimated using past history of early exercise behavior and expectations about future behaviors. Starting with the December 2010 annual grants to the Company’s employees, the Company relied exclusively on its historical volatility as an input to the option pricing model as management believes that this rate will be representative of future volatility over the expected term of the options. Before December 2010, due to the Company’s limited existence of being a public company, the expected volatility assumption was 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 — 30% depending on when and to whom the options are granted. The Company adjusts its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment in the period of change and may impact the amount of compensation expense to be recognized in future periods.

The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. During the years ended December 31, 2010, 2011 and 2012, the Company recognized an expense of $0.5 million, an expense of approximately $0.2 million, and income of approximately $0.1 million, respectively, as a result of revised forfeiture rates.

The weighted average risk-free interest rate represents interest rate for treasury constant maturities published by the Federal Reserve Board. If the term of available treasury constant maturity instruments is not equal to the expected term of an employee option, Cyclacel uses the weighted average of the two Federal Reserve securities closest to the expected term of the employee option.

Restricted Stock

In November 2008, the Company issued 7,142 shares of 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 was accounted for at fair value at the date of grant and an expense is recognized during the vesting term. As of December 31, 2012, all of these awards have vested and there is no remaining unrecognized compensation cost. Summarized information for restricted stock activity for the years ended December 31, 2011 and 2012 is as follows:

	Restricted Stock		Weighted Average Grant Date Value Per Share
Non-vested at December 31, 2010	3,418		$	3.08
Vested	(1,786	)	$	3.08
Non-vested at December 31, 2011	1,632		$	3.08
Vested	(1,632	)	$	3.08
Non-vested at December 31, 2012	—		$	—

Restricted Stock Units

The Company issued 13,100, 34,000, and 12,281 restricted stock units, each of which entitles the holders to receive a share of the Company’s common stock, to senior executives of the Company in November 2008, December 2011, and to employees in January 2012 and February 2012. The 2008 grants vest over four years and the 2011 and 2012 grants vest over three years. A restricted stock unit grant is accounted for at fair value at the date of grant which is equivalent to the market price of a share of the Company’s common stock, and an expense is recognized over the vesting term. As of December 31, 2012, the total remaining unrecognized compensation cost related to the non-vested restricted stock amounted to $0.1 million, which will be amortized over the weighted-average remaining requisite service period of 1.97 years. Summarized information for restricted stock units activity for the years ended December 31, 2011 and 2012 is as follows:

	Restricted Stock Units		Weighted Average Grant Date Value Per Share
Non-vested at December 31, 2010	5,142		$	3.08
Granted	34,000		$	5.81
Vested	(2,679	)	$	3.08
Non-vested at December 31, 2011	36,463		$	5.60
Granted	12,281		$	3.85
Forfeited	(6,904	)	$	4.99
Vested	(2,463	)	$	3.08
Non-vested at December 31, 2012	39,377		$	5.34