U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




[mark
one]


x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the quarterly period ended:  September 30,
  2009




 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the transition period from ______________ to
  ______________




Commission
File Number 333-119366





NOVELOS
THERAPEUTICS, INC.


(Exact name of registrant as
specified in its charter)




DELAWARE
              
              04-3321804(State or other jurisdiction of
                incorporation or
      organization)
              
              (IRS
      Employer
                Identification
      No.)





One
Gateway Center, Suite 504, Newton, Massachusetts 02458


(Address of principal executive
offices)





(617)
244-1616


(Issuer’s telephone number, including
area code)





(Former name, former address, if
changed since last report)





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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  x  No  ̈





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





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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).        Yes  ̈     No  ̈





Number of
shares outstanding of the issuer’s common stock as of the latest practicable
date: 64,215,727 shares of common stock, $.00001 par value per share, as of
November 12, 2009.




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
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


(Check
one):





Large
      accelerated filer
                     ̈
                    Accelerated
      filer  ̈Non-accelerated
      filer
                     ̈
                    Smaller
      reporting company  x(Do
      not check if a smaller reporting company)
  
 
 
  NOVELOS
THERAPEUTICS, INC.




FORM
10-Q INDEX




PART
      I.  FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements
                3Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                17Item
      4.
                Controls
      and Procedures
                21PART
      II. OTHER INFORMATIONItem
      1.
                Legal
      Proceedings
                22Item
      1A.
                Risk
      Factors
                22Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                23Item
      3.
                Defaults
      Upon Senior Securities
                24Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                24Item
      5.
                Other
      Information
                24Item
      6.
                Exhibits
                25


2


PART
I.  FINANCIAL INFORMATION




Item
      1.
            Financial
      Statements





NOVELOS
THERAPEUTICS, INC.


BALANCE
SHEETS




September 30,
                              
                              December 31,2009
                              
                              2008(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and equivalents
                              
                              $
                              5,567,114
                              
                              
                              $
                              1,262,452Prepaid
      expenses and other current assets
                              
                              
                              359,969
                              
                              
                              
                              129,785Total
      current assets
                              
                              
                              5,927,083
                              
                              
                              
                              1,392,237FIXED
      ASSETS, NET
                              
                              
                              54,028
                              
                              
                              
                              58,451DEPOSITS
                              
                              
                              15,350
                              
                              
                              
                              15,350TOTAL
      ASSETS
                              
                              $
                              5,996,461
                              
                              
                              $
                              1,466,038LIABILITIES,
      REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIENCYCURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
                              
                              $
                              2,688,469
                              
                              
                              $
                              4,653,912Accrued
      compensation
                              
                              
                              187,264
                              
                              
                              
                              240,639Accrued
      dividends
                              
                              
                              2,411,558
                              
                              
                              
                              1,689,322Derivative
      liability
                              
                              
                              2,088,176
                              
                              
                              
                              —Deferred
      revenue – current
                              
                              
                              33,333
                              
                              
                              
                              33,333Total
      current liabilities
                              
                              
                              7,408,800
                              
                              
                              
                              6,617,206DEFERRED
      REVENUE – NONCURRENT
                              
                              
                              408,334
                              
                              
                              
                              433,333COMMITMENTS
      AND CONTINGENCIESREDEEMABLE
      PREFERRED STOCK:Series
      D convertible preferred stock, $0.00001 par value; 420 shares designated;
      no shares and 413.5 shares issued and outstanding at September 30, 2009
      and December 31, 2008, respectively
                              
                              
                              —
                              
                              
                              
                              13,904,100Series
      E convertible preferred stock, $0.00001 par value; 735
      shares   designated; 606.399338125 shares and no shares
      issued and outstanding at September 30, 2009 and December 31, 2008,
      respectively (Note 5) (liquidation preference $32,063,367 at September 30,
      2009)
                              
                              
                              20,381,810
                              
                              
                              
                              —20,381,810
                              
                              
                              
                              13,904,100STOCKHOLDERS’
      DEFICIENCY:Preferred
      stock, $0.00001 par value; 7,000 shares authorized:Series
      C cumulative convertible preferred stock; 232 shares issued and
      outstanding at September 30, 2009 and 272 shares issued and outstanding at
      December 31, 2008 (liquidation preference $3,452,160 at September 30,
      2009)
                              
                              
                              —
                              
                              
                              
                              —Common
      stock, $0.00001 par value; 150,000,000 shares authorized; 55,455,394
      shares issued and outstanding at September 30, 2009 and 43,975,656 shares
      issued and outstanding at December 31, 2008
                              
                              
                              555
                              
                              
                              
                              440Additional
      paid-in capital
                              
                              
                              41,008,571
                              
                              
                              
                              40,204,112Accumulated
      deficit
                              
                              
                              (63,211,609
                              )
                              
                              
                              (59,693,153
                              )Total
      stockholders’ deficiency
                              
                              
                              (22,202,483
                              )
                              
                              
                              (19,488,601
                              )TOTAL
      LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’
      DEFICIENCY
                              
                              $
                              5,996,461
                              
                              
                              $
                              1,466,038




See
notes to financial statements.


3


NOVELOS
THERAPEUTICS, INC.


STATEMENTS
OF OPERATIONS


(Unaudited)





Three Months Ended September 30,
                          
                          
                          Nine Months Ended September 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008REVENUE
                          
                          $
                          13,702
                          
                          
                          $
                          35,513
                          
                          
                          $
                          76,983
                          
                          
                          $
                          89,523COSTS
      AND EXPENSES:Research
      and development
                          
                          
                          1,765,664
                          
                          
                          
                          1,971,501
                          
                          
                          
                          5,137,955
                          
                          
                          
                          12,929,184General
      and administrative
                          
                          
                          545,883
                          
                          
                          
                          622,347
                          
                          
                          
                          1,528,826
                          
                          
                          
                          1,602,120Total
      costs and expenses
                          
                          
                          2,311,547
                          
                          
                          
                          2,593,848
                          
                          
                          
                          6,666,781
                          
                          
                          
                          14,531,304LOSS
      FROM OPERATIONS
                          
                          
                          (2,297,845
                          )
                          
                          
                          (2,558,335
                          )
                          
                          
                          (6,589,798
                          )
                          
                          
                          (14,441,781
                          )OTHER
      INCOME (EXPENSE):Interest
      income
                          
                          
                          —
                          
                          
                          
                          21,344
                          
                          
                          
                          1,012
                          
                          
                          
                          122,556Loss
      on derivatives (Notes 1 and 2)
                          
                          
                          (446,685
                          )
                          
                          
                          —
                          
                          
                          
                          (2,830,274
                          )
                          
                          
                          —Miscellaneous
                          
                          
                          1,500
                          
                          
                          
                          2,250
                          
                          
                          
                          6,233
                          
                          
                          
                          6,750Total
      other income (expense)
                          
                          
                          (445,185
                          )
                          
                          
                          23,594
                          
                          
                          
                          (2,823,029
                          )
                          
                          
                          129,306NET
      LOSS
                          
                          
                          (2,743,030
                          )
                          
                          
                          (2,534,741
                          )
                          
                          
                          (9,412,827
                          )
                          
                          
                          (14,312,475
                          )PREFERRED
      STOCK DIVIDENDS
                          
                          
                          (842,996
                          )
                          
                          
                          (530,467
                          )
                          
                          
                          (2,495,90222
                          )
                          
                          
                          (1,463,715
                          )PREFERRED
      STOCK DEEMED DIVIDENDS
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (714,031
                          )
                          
                          
                          (4,417,315
                          )NET
      LOSS ATTRIBUTABLE TO COMMONSTOCKHOLDERS
                          
                          $
                          (3,586,026
                          )
                          
                          $
                          (3,065,208
                          )
                          
                          $
                          (12,622,760
                          )
                          
                          $
                          (20,193,505
                          )BASIC
      AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
      SHARE
                          
                          $
                          (0.07
                          )
                          
                          $
                          (0.07
                          )
                          
                          $
                          (0.27
                          )
                          
                          $
                          (0.50
                          )SHARES
      USED IN COMPUTING BASIC ANDDILUTED
      NET LOSS ATTRIBUTABLE TOCOMMON
      STOCKHOLDERS PER COMMON SHARE
                          
                          
                          49,653,675
                          
                          
                          
                          41,667,964
                          
                          
                          
                          45,944,799
                          
                          
                          
                          40,132,085




See
notes to financial statements.


4


NOVELOS
THERAPEUTICS, INC.


STATEMENTS
OF CASH FLOWS


(Unaudited)





Nine Months Ended September 30,2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (9,412,827
                      )
                      
                      $
                      (14,312,475
                      )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
                      
                      
                      22,423
                      
                      
                      
                      11,955Loss
      on disposal of fixed assets
                      
                      
                      —
                      
                      
                      
                      6,472Stock-based
      compensation
                      
                      
                      503,161
                      
                      
                      
                      330,296Loss
      on derivatives
                      
                      
                      2,830,274
                      
                      
                      
                      —Changes
      in:Prepaid
      expenses and other current assets
                      
                      
                      (230,184
                      )
                      
                      
                      (62,934
                      )Accounts
      payable and accrued liabilities
                      
                      
                      (1,965,443
                      )
                      
                      
                      (751,979
                      )Accrued
      compensation
                      
                      
                      (53,375
                      )
                      
                      
                      (102,208
                      )Deferred
      revenue
                      
                      
                      (24,999
                      )
                      
                      
                      475,000Cash
      used in operating activities
                      
                      
                      (8,330,970
                      )
                      
                      
                      (14,405,873
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of fixed assets
                      
                      
                      (18,000
                      )
                      
                      
                      (31,003
                      )Change
      in restricted cash
                      
                      
                      —
                      
                      
                      
                      1,184,702Cash
      provided by (used in) investing activities
                      
                      
                      (18,000
                      )
                      
                      
                      1,153,699CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock, net
                      
                      
                      3,449,101
                      
                      
                      
                      2,986,738Proceeds
      from the sale of preferred stock and warrants, net
                      
                      
                      9,204,531
                      
                      
                      
                      5,469,672Dividends
      paid to preferred stockholders
                      
                      
                      —
                      
                      
                      
                      (740,280
                      )Proceeds
      from exercise of stock option
                      
                      
                      —
                      
                      
                      
                      1,000Cash
      provided by financing activities
                      
                      
                      12,653,632
                      
                      
                      
                      7,717,130INCREASE
      (DECREASE) IN CASH AND EQUIVALENTS
                      
                      
                      4,304,662
                      
                      
                      
                      (5,535,044
                      )CASH
      AND EQUIVALENTS AT BEGINNING OF YEAR
                      
                      
                      1,262,452
                      
                      
                      
                      9,741,518CASH
      AND EQUIVALENTS AT END OF PERIOD
                      
                      $
                      5,567,114
                      
                      
                      $
                      4,206,474SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIESDeemed
      dividends on preferred stock
                      
                      $
                      714,031
                      
                      
                      $
                      4,417,315Dividends
      accrued but not paid to preferred stockholders
                      
                      $
                      2,294,321
                      
                      
                      $
                      1,060,935Dividends
      paid to preferred stockholders in shares of Series E preferred
      stock
                      
                      $
                      1,597,144
                      
                      
                      $
                      —Relative
      fair value of warrants issued to stockholders
                      
                      $
                      3,659,692
                      
                      
                      $
                      1,302,592Issuance
      of common stock in exchange for tender of warrants
                      
                      $
                      1,625,760
                      
                      
                      $
                      —Reclassification
      of derivative liability to paid-in capital upon cashless exercise of
      warrants
                      
                      $
                      115,283
                      
                      
                      $
                      —Exchange
      of Series B preferred stock for Series D preferred stock
                      
                      $
                      —
                      
                      
                      $
                      9,918,666Exchange
      of Series D preferred stock for Series E preferred stock
                      
                      $
                      13,904,100
                      
                      
                      $
                      —Conversion
      of Series E preferred stock and accumulated dividends into common
      stock
                      
                      $
                      2,039,130
                      
                      
                      $
                      —Conversion
      of Series C preferred stock and accumulated dividends into common
      stock
                      
                      $
                      569,566
                      
                      
                      $
                      —




See
notes to financial statements.


5


Novelos
Therapeutics, Inc.


Notes
to Financial Statements





1.
            NATURE
      OF BUSINESS, BASIS OF PRESENTATION





Novelos
Therapeutics, Inc. (‘‘Novelos’’ or the ‘‘Company’’) is a drug development
company focused on the development of therapeutics for the treatment of cancer
and hepatitis.  Novelos owns exclusive worldwide intellectual property
rights (excluding Russia and other states of the former Soviet Union (the
“Russian Territory”), but including Estonia, Latvia and Lithuania) related to
certain clinical compounds and other pre-clinical compounds based on oxidized
glutathione.





The
Company is devoting substantially all of its efforts toward the research and
development of its products and has incurred operating losses since
inception.  The process of developing products will continue to
require significant research and development, non-clinical testing, clinical
trials and regulatory approval.  The Company expects that these
activities, together with general and administrative costs, will result in
continuing operating losses for the foreseeable future. The primary endpoint of
the Company’s Phase 3 clinical trial for NOV-002 in non-small cell lung cancer
is increased median overall survival, to be measured following the occurrence of
725 events (deaths).  The Company anticipates that the results from
this trial will be available in early 2010.  On August 25, 2009, the
Company entered into a Securities Purchase Agreement (the “August 2009 Purchase
Agreement”) with Purdue Pharma L.P. (“Purdue”) contemplating the issuance and
sale at two or more closings of up to 13,636,364 shares of Novelos common stock
and warrants to purchase approximately 4,772,728 shares of Novelos common stock
at an exercise price of $0.66 per share, expiring December 31, 2015, for an
aggregate purchase price of $9,000,000.  At the initial closing on
August 25, 2009, the Company sold Purdue 5,303,030 shares of common stock and a
warrant to purchase 1,856,062 shares of common stock for gross proceeds of
$3,500,000.  At the final closing under the August 2009 Purchase
Agreement on November 10, 2009, the Company sold Purdue 8,333,334 shares of
Novelos common stock and a warrant to purchase 2,916,668 shares of Novelos
common stock for gross proceeds of $5,500,000.  The August 2009
Purchase Agreement required the Company to adopt an expanded development and
regulatory plan for NOV-002 (the “Plan”), which contemplates substantial
expenditures through mid-2010 in addition to clinical development expenditures
previously contemplated for the completion of the Phase 3 trial.  The
Company is required to use proceeds from the sale of securities under the August
2009 Purchase Agreement for the expenditures identified in the
Plan.  The Company believes that the available funds at September 30,
2009, plus the proceeds from the final closing under the August 2009 Purchase
Agreement will allow it to operate beyond the conclusion of the Phase 3 trial
and into the third quarter of 2010.




The
completion of the Phase 3 clinical trial is likely to significantly affect the
Company’s ability to finance continued operations beyond the third quarter of
2010.   If the results are favorable, the Company believes it
will be able to obtain adequate funding to pursue its strategic objectives and
clinical development programs longer term.  If the results of the
Phase 3 clinical trial are not favorable, the Company may be unable to obtain
additional funding, and may be required to scale back administrative activities
and clinical development programs, or cease its operations
entirely.  Furthermore, adverse conditions in the capital markets
globally may impair the Company’s ability to obtain funding in a timely
manner.




The
accompanying unaudited financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
(“GAAP”) for interim financial information and with the instructions to Form
10-Q.  Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for the fair presentation of these financial statements have been
included. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Interim results are
not necessarily indicative of results to be expected for other quarterly periods
or for the entire year ending December 31, 2009. These unaudited financial
statements should be read in conjunction with the audited financial statements
and related notes thereto included in the Company’s latest annual report for the
year ended December 31, 2008 on Form 10-K, which was filed with the Securities
and Exchange Commission (“SEC”) on March 30, 2009.





Recently Issued Accounting Standards
–In June 2009, the Financial Accounting Standards Board (“FASB”) issued
FASB ASC 105, Generally
Accepted Accounting Principles, which establishes the FASB Accounting
Standards Codification (“ASC”) as the sole source of authoritative generally
accepted accounting principles (“GAAP”). Pursuant to the provisions of FASB ASC
105, the Company has updated references to GAAP in its financial statements
issued for the period ended September 30, 2009. The adoption of FASB ASC 105 did
not impact the Company’s financial position or results of
operations.


6




In May
2009, the FASB issued new authoritative guidance now codified as FASB ASC Topic
855 related to subsequent events, which establishes general standards of
accounting for and disclosures of subsequent events that occur after the balance
sheet date but prior to the issuance of financial statements. The guidance
requires additional disclosure regarding the date through which subsequent
events have been evaluated by the entity as well as whether that date is the
date the financial statements were issued. This guidance became effective for
the Company’s financial statements as of June 30, 2009. The Company has
evaluated subsequent events through November 16, 2009.





Comprehensive Income (Loss)–
The Company had no components of comprehensive income (loss) other than the net
loss in all periods presented.





Derivative Instruments - The
Company generally does not use derivative instruments to hedge exposures to cash
flow or market risks; however, certain warrants to purchase common stock that do
not meet the requirements for classification as equity, in accordance with the
Derivatives and Hedging Topic of the FASB ASC,are classified as
liabilities.  In such instances, net-cash settlement is assumed for
financial reporting purposes, even when the terms of the underlying contracts do
not provide for a net-cash settlement. These warrants are considered derivative
instruments since the agreements contain “down-round” provisions whereby the
number of shares for which the options are exercisable and/or the exercise price
of the warrants is subject to change in the event of certain issuances of stock
at prices below the then-effective exercise price of the
warrants.  The number of such warrants was 14,003,319 at January 1,
2009 and 8,012,180 at September 30, 2009.  The primary underlying risk
exposure pertaining to the warrants is the change in fair value of the
underlying common stock.  Such financial instruments are initially
recorded at fair value, or relative fair value when issued with other
instruments, with subsequent changes in fair value recorded as a component of
gain or loss on derivatives in each reporting period. If these instruments
subsequently meet the requirements for equity classification, the Company
reclassifies the fair value to equity.  At September 30, 2009, these
warrants represent the only outstanding derivative instruments issued or held by
the Company.





2.
            CHANGE
      IN ACCOUNTING PRINCIPLE




Effective
January 1, 2009, the Company adopted the guidance of FASB ASC 815-40, Derivatives and Hedging,
which establishes a framework for determining whether certain freestanding and
embedded instruments are indexed to a company’s own stock for purposes of
evaluation of the accounting for such instruments under existing accounting
literature.  As a result of this adoption, certain warrants that were
previously determined to be indexed to the Company’s common stock upon issuance
were determined not to be indexed to the Company’s common stock because they
include ‘down-round’ anti-dilution provisions.  The fair value of the
warrants at the dates of issuance totaling $6,893,000 was initially recorded as
a component of additional paid-in capital. Upon adoption of this guidance, in
the first quarter of 2009, the Company recorded a decrease to the opening
balance of additional-paid-in capital of $6,893,000 and recorded a decrease to
accumulated deficit totaling $5,894,000, representing the decrease in the fair
value of the warrants from the date of issuance to December 31,
2008.  The increase in fair value of the warrants of $447,000 during
the three months ended September 30, 2009 and $2,830,000 during the nine months
ended September 30, 2009 has been included as a component of other income in the
accompanying statements of operations for the respective
period.  Certain of the warrants that had been recorded as a
derivative liability were exchanged for shares of the Company’s common stock
during the three months ended September 30, 2009. See Note 5 for a description
of that transaction. The fair value of the warrants at September 30, 2009 of
$2,088,000 is included as a current liability in the accompanying balance sheet
as of that date.





3.
            FAIR
      VALUES OF ASSETS AND LIABILITIES





In
accordance with Fair Value Measurements and Disclosures Topic of the FASB ASC,
the Company groups its financial assets and financial liabilities generally
measured at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to
determine fair value.





·
            Level
      1: Input prices quoted in an active market for identical financial assets
      or liabilities.


·
            Level
      2: Inputs other than prices quoted in Level 1, such as prices quoted for
      similar financial assets and liabilities in active markets, prices for
      identical assets and liabilities in markets that are not active or other
      inputs that are observable or can be corroborated by observable market
      data.


·
            Level
      3: Input prices quoted that are significant to the fair value of the
      financial assets or liabilities which are not observable or supported by
      an active market.





Assets
and liabilities measured at fair value on a recurring basis are summarized
below:


7




September 30, 2009Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                Fair ValueLiabilities:Warrants
                
                $
                -
                
                
                $
                2,088,000
                
                
                $
                -
                
                
                $
                2,088,000




The fair
value of warrants has been estimated using the Black-Scholes option pricing
model based on the closing price of the common stock at the valuation date,
estimated volatility of 90%, terms ranging from six to seventeen months and
risk-free interest rates ranging from 0.18% to 0.68%.




4.
            COLLABORATION
      AGREEMENTS





2009
Collaboration Agreement with Mundipharma





On
February 11, 2009, Novelos entered into a collaboration agreement (the
“Collaboration Agreement”) with Mundipharma International Corporation Limited
(“Mundipharma”) to develop, manufacture and commercialize, on an exclusive
basis, Licensed Products (as defined in the Collaboration Agreement), which
includes the Company’s lead compound, NOV-002, in Europe (other than the Russian
Territory), Asia (other than Hong Kong, Macau, China and Taiwan, the “Chinese
Territory”) and Australia (collectively referred to as the “Mundipharma
Territory”).  Mundipharma is an independent associated company of
Purdue Pharma L.P. (“Purdue”).





Under the
Collaboration Agreement, Mundipharma received an exclusive license to develop,
manufacture, market, sell or otherwise distribute the Licensed Products and
improvements thereon in the Mundipharma Territory.  Novelos is
responsible for the cost and execution of development, regulatory submissions
and commercialization of NOV-002 outside the Mundipharma Territory, and
Mundipharma is responsible for the cost and execution of certain development
activities, all regulatory submissions and all commercialization within the
Mundipharma Territory.  In the unlikely event that Mundipharma is
required to conduct an additional Phase 3 clinical trial in first-line
advanced-stage non-small cell lung cancer in order to gain regulatory approval
in Europe, Mundipharma will be entitled to recover the full cost of such trial
by reducing milestone, fixed sales-based payments and royalty payments to
Novelos by up to 50% of the payments owed until Mundipharma recovers the full
costs of such trial.  In order for Mundipharma or Novelos to access
the other party’s data or intellectual property related to Independent Trials
(as defined in the Collaboration Agreement), the accessing party must pay the
sponsoring party 50% of the cost of such trial.





The
launch of Licensed Products, including initiation of regulatory and pricing
approvals, and subsequent commercial efforts to market and sell Licensed
Products in each country in the Mundipharma Territory, will be determined by
Mundipharma based on its assessment of the commercial viability of the Licensed
Products, the regulatory environment and other factors. Novelos has no assurance
that it will receive any amount of the launch payments, fixed sales-based
payments or royalties described below.





Mundipharma
will pay Novelos $2.5 million upon the launch of NOV-002 in each country, up to
a maximum of $25 million. In addition, Mundipharma will make fixed sales-based
payments up to an aggregate of $60 million upon the achievement of certain
annual sales levels payable once the annual net sales exceed the specified
thresholds.  Mundipharma will also pay as royalties to Novelos, during
the term of the Collaboration Agreement, a double-digit percentage on net sales
of Licensed Products, based upon a four-tier royalty schedule, in countries
within the Mundipharma Territory where Novelos held patents on the licensed
technology as of the effective date of the agreement.  Royalties in
countries in the Mundipharma Territory where Novelos did not hold patents as of
the effective date will be paid at 50% of the royalty rates in countries where
patents were held. The royalties will be calculated based on the incremental net
sales in the respective royalty tiers and shall be due on net sales in each
country in the Territory where patents are held until the last patent expires in
the respective country.  In countries in the Munidpharma Territory
where Novelos does not hold patents as of the effective date of the
Collaboration Agreement, royalties will be due until the earlier of 15 years
from the date of the Collaboration Agreement or the introduction of a generic in
the respective country resulting in a 20% drop in Mundipharma’s market share in
such country.


8


For
countries in which patents are held, the Collaboration Agreement expires on a
country-by-country basis within the MundipharmaTerritory on the earlier of (1)
expiration of the last applicable Novelos patent within the country or (2) the
determination that any patents within the country are invalid, obvious or
otherwise unenforceable.  For countries in which no patents are held,
the Collaboration Agreement expires the earlier of 15 years from its effective
date or upon generic product competition in the country resulting in a 20% drop
in Mundipharma’s market share. Novelos may terminate the Collaboration Agreement
upon breach or default by Mundipharma.  Mundipharma may terminate the
Collaboration Agreement upon breach or default, filing of voluntary or
involuntary bankruptcy by Novelos, the termination of certain agreements with
companies associated with the originators of the licensed technology, or 30-day
notice for no reason.  If any regulatory approval within the Territory
is suspended as a result of issues related to the safety of the Licensed
Products, then Mundipharma’s obligations under the Collaboration Agreement will
be suspended until the regulatory approval is reinstated.  If that
reinstatement does not occur within 12 months of the suspension, then
Mundipharma may terminate the Collaboration Agreement.





Concurrent
with the execution of the Collaboration Agreement, Novelos completed a private
placement of preferred stock and warrants to Purdue, an independent associated
company of Mundipharma. See ‘Series E Preferred Stock Private Placement’
below.





2007
Collaboration Agreement with Lee’s Pharmaceutical (HK) Ltd.




In
December 2007 the Company entered into a Collaboration Agreement with Lee’s
Pharmaceutical (HK) Ltd. (“Lee’s Pharm”).  Pursuant to this agreement,
Lee’s Pharm obtained an exclusive license to develop, manufacture and
commercialize NOV-002 and NOV-205 in the Chinese Territory.  Under the
terms of the agreement the Company received a license fee of $500,000 in March
2008 and is entitled to receive up to $1,700,000 in future milestone payments
upon the completion of development and marketing milestones by Lee’s
Pharm.  This initial $500,000 payment received is being amortized over
the estimated term of this agreement, 15 years.  Accordingly, $8,333
and $25,000 of license revenue was recognized in each of the three and nine
month periods, respectively, ended September 30, 2009 and 2008.




The
Company will receive royalty payments of 20-25% of net sales of NOV-002 in the
Chinese Territory and will receive royalty payments of 12-15% of net sales of
NOV-205 in the Chinese Territory. Lee’s Pharm will also reimburse the Company
for the manufacturing cost of pharmaceutical products provided to Lee’s Pharm in
connection with the agreement.  Lee’s Pharm has committed to spend a
minimum amount on development in the first four years of the agreement. The
agreement expires upon the expiration of the last patent covering any of the
licensed products, or twelve years from the date of the first commercial sale in
China, whichever occurs later.




5.
            STOCKHOLDERS’
      DEFICIENCY





August
2009 Common Stock Private Placement





Securities
Purchase Agreement





On August
25, 2009,  the Company entered into the August 2009 Purchase Agreement
with Purdue to sell 13,636,364 shares of its common stock, $0.00001 par value
and warrants to purchase 4,772,728 shares of its common stock at an exercise
price of $0.66 per share, expiring December 31, 2015, for an aggregate purchase
price of $9,000,000.  Concurrently with the execution and delivery of
the August 2009 Purchase Agreement, the Company initially sold Purdue 5,303,030
shares of its common stock and a warrant to purchase 1,856,062 shares of its
common stock at $0.66 per share for approximately $3,500,000 (the “Initial
Closing”).  The sale of the remaining common stock and warrants was
completed on November 10, 2009.  See Note 9.





Pursuant
to the August 2009 Purchase Agreement, from the date of the Initial Closing
until Purdue receives certain data related to the Company’s Phase 3 clinical
trial in non-small cell lung cancer (the “Exclusive Negotiation Period”) Purdue
has the exclusive right to negotiate with Novelos for the license or other
acquisition of NOV-002 Rights (as defined in the August 2009 Purchase Agreement)
in the United States (the “U.S. License”).  If, during the Exclusive
Negotiation Period, Purdue and Novelos agree on terms for a definitive agreement
for the U.S. License, Novelos shall grant Purdue an option to enter into such
definitive agreement within 30 days after the expiration of the Exclusive
Negotiation Period.  Purdue is entitled to a right of first refusal
(the “Right of First Refusal”) with respect to bona fide offers for a U.S.
License received from third parties and approved by the Company’s board of
directors.  Under the Right of First Refusal, Novelos will be required
to communicate to Purdue the terms of any such third-party offers received and
Purdue will have 30 days to enter into a definitive agreement with Novelos on
substantially similar terms that provide no lesser economic benefit to Novelos
as provided in the third-party offer.  The Right of First Refusal
terminates upon specified business combinations occurring after the Exclusive
Negotiation Period.  Novelos has separately entered into letter agreements
with Mundipharma and its independent associated company providing for a
conditional exclusive right to negotiate for, and a conditional right of first
refusal with respect to, NOV-002 Rights for Latin America, Mexico and
Canada.


9





Pursuant
to the August 2009 Purchase Agreement, Purdue has the right to either designate
one member to Novelos’ board of directors (the “Board”) or designate an observer
to attend all meetings of the Board, committees thereof and access to all
information made available to members of the Board.  This right lasts
until the later of such time as Purdue or its  associated companies no
longer hold at least one-half of the common stock purchased pursuant to the
August 2009 Purchase Agreement and no longer hold at least one-half of the
Series E Preferred Stock issued to them on February 11, 2009. The right to
designate a board observer had previously been granted in connection with the
financing that occurred on February 11, 2009 and Purdue appointed such an
observer in February 2009. Purdue also has the right to participate in future
equity financings in proportion to their pro rata ownership of common and
preferred stock.





Common
Stock Purchase Warrant




The
common stock purchase warrant has an exercise price of $0.66 per share and
expires on December 31, 2015.  The warrant exercise price and/or the
number of shares of common stock issuable pursuant to such warrant will be
subject to adjustment for stock dividends, stock splits or similar capital
reorganizations so that the rights of the warrant holders after such event will
be equivalent to the rights of warrant holders prior to such
event.  The relative fair value of the warrant issued to Purdue at the
Initial Closing of $752,000 was recorded as a component of additional paid-in
capital.  The fair value of the warrant was determined using the
Black-Scholes method of valuation, estimated volatility of 90%, a risk-free
interest rate of 2.02% and a term equal to the term of the warrant.




Registration
Rights Agreement





As part
of this transaction, the Company entered into a registration rights agreement
with Purdue.  The registration rights agreement requires the Company
to file with the Securities and Exchange Commission no later than 5 business
days following the earlier of the six-month anniversary of (i) the Final
Subsequent Closing (as defined in the August 2009 Purchase Agreement) or (ii)
the end of the Exclusive Negotiation, a registration statement covering the
resale of all the shares of common stock issued pursuant to the August 2009
Purchase Agreement and all shares of common stock issuable upon exercise of the
warrants issued pursuant to the August 2009 Purchase Agreement. The Company is
required to use its best efforts to have the registration statement declared
effective and keep the registration statement continuously effective under the
Securities Act until the earlier of the date when all the registrable securities
covered by the registration statement have been sold or the second anniversary
of the closing.  In the event the Company fails to file the
registration statement timely, it will be required to pay Purdue liquidated
damages equal to 1.5% per month (pro-rated on a daily basis for any period of
less than a full month) of the aggregate purchase price of the common stock and
until the delinquent registration statement is filed.  The Company
will be allowed to suspend the use of the registration for not more than 15
consecutive days or for a total of not more than 30 days in any 12-month
period.  In the event that any sale or issuances of common stock and
warrants pursuant to the Purchase Agreement occur after this filing deadline,
the Company will be required to file a registration statement covering the
registrable securities issued within 5 business days following the three-month
anniversary of such sale or issuance.  As of September 30, 2009, and
through the date of this filing, the Company has not concluded that it is
probable that damages will become due; therefore, no accrual for damages has
been recorded.





Series
E Preferred Stock Private Placement





Sale
of Series E Preferred Stock to Purdue Pharma





Concurrently
with the execution of the Collaboration Agreement, Novelos sold to Purdue 200
shares of a newly created series of the Company’s preferred stock, designated
“Series E Convertible Preferred Stock”, par value $0.00001 per share (the
“Series E Preferred Stock”), and a warrant (the “Series E Warrant”) to purchase
9,230,769 shares of Novelos common stock for an aggregate purchase price of
$10,000,000 (the “Series E Financing”).





The
Series E Warrant is exercisable for an aggregate of 9,230,769 shares of Novelos
common stock at an exercise price of $0.65 per share. The warrant expires on
December 31, 2015.  The warrant exercise price and/or the common stock
issuable pursuant to such warrant are subject to adjustment for stock dividends,
stock splits or similar capital reorganizations so that the rights of the
warrant holders after such event will be equivalent to the rights of warrant
holders prior to such event.


10


Exchange
of Series D Preferred Stock for Series E Preferred Stock





The
Company also entered into an exchange agreement with the holders (the “Series D
Investors”) of the Company’s Series D Convertible Preferred Stock (the “Series D
Preferred Stock”) under which all 413.5 outstanding shares of Series D Preferred
Stock and accumulated but unpaid dividends thereon were exchanged for 445.442875
shares of Series E Preferred Stock.  The rights and preferences of the
Series E Preferred Stock are substantially the same as the Series D Preferred
Stock. In addition, the holders of Series D Preferred Stock waived liquidated
damages through the date of the exchange as a result of the Company’s failure to
file a registration statement covering the shares of common stock underlying the
Series D Preferred Stock and warrants not otherwise registered.  In
connection with the execution of this exchange agreement, warrants held by the
Series D Investors to purchase a total of 11,865,381 shares of the Company’s
common stock were amended to extend the expiration of the warrants to December
31, 2015 (from April 11, 2013) and to remove the forced exercise provision.
Also, the registration rights agreement dated May 2, 2007 with the Series D
Investors was amended to revise the definition of registrable securities under
the agreement to refer to Series E Preferred Stock.





Terms
of Series E Preferred Stock





The
shares of Series E Preferred Stock have a stated value of $50,000 per share and
are convertible into shares of common stock any time after issuance at the
option of the holder at $0.65 per share of common stock. If there is an
effective registration statement covering the shares of common stock underlying
the Series E Preferred Stock and the VWAP, as defined in the Series E
Certificate of Designations, of Novelos common stock exceeds $2.00 for 20
consecutive trading days, then the outstanding Series E Preferred Stock will
automatically convert into common stock at the conversion price then in
effect.  The conversion price will be subject to adjustment for stock
dividends, stock splits or similar capital reorganizations.





The
Series E Preferred Stock has an annual dividend rate of 9%, payable
semi-annually on June 30 and December 31.  Such dividends may be paid
in cash, in shares of Series E Preferred Stock or in registered shares of
Novelos common stock at the Company’s option, subject to certain
conditions.




For as
long as any shares of Series E Preferred Stock remain outstanding, Novelos is
prohibited from (i) paying dividends to its common stockholders, (ii) amending
its certificate of incorporation or by-laws, (iii) issuing any equity security
or any security convertible into or exercisable for any equity security at a
price of $0.65 or less or with rights senior to the Series E Preferred Stock
(except for certain exempted issuances), (iv) increasing the number of shares of
Series E Preferred Stock or issuing any additional shares of Series E Preferred
Stock, (v) selling or otherwise disposing of all or substantially all of its
assets (or in the case of licensing, any material intellectual property) or
entering into a merger or consolidation with another company unless Novelos is
the surviving corporation, the Series E Preferred Stock remains outstanding and
there are no changes to the rights and preferences of the Series E Preferred
Stock, (vi) redeeming or repurchasing any capital stock other than the Series E
Preferred Stock, (vii) incurring any new debt for borrowed money in excess of
$500,000 and (viii) changing the number of the Company’s directors.




Registration
Rights Agreement





Simultaneous
with the execution of the Purchase Agreement, the Company entered into a
registration rights agreement (the “Registration Rights Agreement”) with Purdue
and the Series D Investors.  The Registration Rights Agreement
requires Novelos to file with the Securities and Exchange Commission no later
than 5 business days following the six-month anniversary of the execution of the
Purchase Agreement (the “Filing Deadline”), a registration statement covering
the resale of (i) a number of shares of common stock equal to 100% of the shares
issuable upon conversion of the Series E Preferred Stock (excluding 12,000,000
shares of common stock issuable upon conversion of the Series E Preferred Stock
issued in exchange for shares of outstanding Series D Preferred Stock as
described below that are included on a prior registration statement), (ii)
9,230,769 shares of common stock issuable upon exercise of the warrants issued
to Purdue and (iii) 11,865,381 shares of common stock issuable upon exercise of
warrants held by the Series D Investors. Novelos will be required to use its
best efforts to have the registration statement declared effective and to keep
the registration statement continuously effective under the Securities Act until
the earlier of the date when all the registrable securities covered by the
registration statement have been sold or the second anniversary of the
closing.  Purdue and the Series D Investors consented to extend the
Filing Deadline to September 15, 2009.  The registration statement was
filed on that date, but has not yet been declared effective.  The use
of the registration statement may be suspended for not more than 15 consecutive
days or for a total of not more than 30 days in any 12-month
period.   The Registration Rights Agreement replaces a prior
agreement dated April 11, 2008 between Novelos and the Series D
Investors.




11





The Company has an
obligation to maintain an effective registration statement covering 12,000,000
shares of common stock issuable upon Series E Preferred Stock, pursuant to a
registration rights agreement dated May 3, 2007, as
amended.The agreement, as amended, requires the Company to
use its best efforts to keep a registration statement covering 12,000,000 shares
of common stock continuously effective under the Securities Act until the
earlier of the date when all securities covered by this registration statement
have been sold or May 3, 2010.   In the event the Company does
not fulfill the requirements of the registration rights agreement, the Company
is required to pay to the investors liquidated damages equal to 1.5% per month
of the aggregate purchase price of the preferred stock and warrants until the
requirements have been met.  The second post-effective amendment was
declared effective on April 27, 2009. As of September 30, 2009,
and through the date of this filing, the Company has not concluded that it is
probable that damages will become due; therefore, no accrual for damages has
been recorded.





Advisor
Fees




Ferghana
Partners, Inc. (“Ferghana”), a New York consulting firm, received a cash fee for
their services in connection with the negotiation and execution of the
Collaboration Agreement equal to $700,000 (or seven percent (7%) of the gross
proceeds to the Company resulting from the sale of Series E Preferred Stock and
Common Stock Purchase Warrants to Purdue in connection with the Collaboration
Agreement).  Ferghana will also receive cash fees equal to six percent
(6%) of all payments to Novelos by Mundipharma under the Collaboration Agreement
other than royalties on net sales.





Accounting
Treatment of Series E Financing





The terms
of the Series E Preferred Stock contain provisions that may require redemption
in circumstances that are beyond the Company’s control. Therefore, the shares
have been recorded as redeemable preferred stock outside of permanent equity in
the balance sheet as of September 30, 2009.  The gross proceeds of
$10,000,000 received in conjunction with the Series E Financing were allocated
on a relative fair value basis between the Series E Preferred Stock and the
warrants.  The relative fair value of the warrants issued to investors
of $2,907,000 (determined using the Black-Scholes option pricing model,
estimated volatility of 80%, a risk-free interest rate of 2.17% and a term equal
to the term of the warrant) was
recorded as additional paid-in capital while the relative fair value of the
Series E Preferred Stock of $7,093,000 was recorded as temporary
equity.  The carrying value of the Series E Preferred Stock was
immediately adjusted to its fair value of $7,385,000 based on the fair value of
the as-converted common stock.  The difference of $292,000 represents
a beneficial conversion feature and was recorded as a deemed dividend to
preferred stockholders. Issuance costs related to the Series E Financing of
$795,000 were netted against temporary equity.  The Series E Preferred
Stock that was issued in payment of dividends was initially recorded in
temporary equity at the value of the dividends that had accrued totaling
$1,597,000. This amount was then adjusted to the fair value of $1,179,000 based
on the fair value of the as-converted common stock.  The difference of
$418,000 was recorded as an offset to the deemed dividends
recorded.  The Series E Preferred Stock that was issued in exchange
for outstanding shares of Series D Preferred Stock was recorded at $13,904,000,
the carrying value of the shares of Series D Preferred Stock as of the date of
the exchange.





As a
result of the modification to the warrants to extend their expiration by
approximately 32 months that occurred in connection with the exchange of all
outstanding shares of Series D Preferred Stock for shares of Series E Preferred
Stock, in the nine months ended September 30, 2009, a deemed dividend of
$840,000 was recorded.  This amount represents the incremental fair
value of the warrants immediately before and after modification using the
Black-Scholes option pricing model, volatility of 80%, discount rates of 1.54%
and 2.17% and the remaining warrant term.





Since the
Company has concluded it is not probable that an event will occur which would
allow the holders of Series E Preferred Stock to elect to receive a liquidation
payment, the carrying value will not be adjusted until the time that such event
becomes probable. The liquidation preference (redemption value) is $32,063,000
at September 30, 2009.





Conversions of
Preferred Stock –During the three and nine months ended September 30,
2009, 39.04349375 shares of the Company’s Series E preferred stock, having an
aggregate stated value of $1,952,000, and accumulated dividends
thereon,  were converted into 3,137,119 shares of common
stock.  The associated carrying value of the converted shares totaling
approximately $1,291,000 was reclassified to permanent equity from temporary
equity.  See Note 9 for a description of a conversion of Series E
preferred stock which occurred in November 2009.





During
the three months ended September 30, 2009, 5 shares of the Company’s Series C
preferred stock, having an aggregate stated value of $60,000, and accumulated
dividends thereon were converted into 114,410 shares of the Company’s common
stock.  During the nine months ended September 30, 2009, 40 shares of
the Company’s Series C preferred stock, having an aggregate stated value of
$480,000, and accumulated dividends thereon were converted into 876,253 shares
of the Company’s common stock.


12





Warrant Exchange
–On August 21, 2009, the Company entered into exchange agreements with
certain accredited investors who held warrants to purchase 6,947,728 shares of
its common stock.  Pursuant to the exchange agreements, an aggregate
of 2,084,308 shares of the Company’s common stock with a fair value of
$1,626,000 were issued in exchange for these warrants.  The holders
agreed not to transfer or dispose of the shares of common stock until February
18, 2010.  The warrants had been recorded as a derivative liability on
the Company’s balance sheet at their estimated fair value of $1,109,000 at the
date of exchange.  The difference of $517,000 between the estimated
fair value of the warrants at the date of exchange and the common stock issued
to settle the derivative liability has been included as a component of the loss
on derivatives for the three and nine months ended September 30,
2009.





These
warrants had been issued in March 2006 in connection with a private placement of
Novelos common stock, had an expiration date of March 7, 2011 and were
exercisable at a price of $1.82 per share.  Following the exchange,
warrants expiring on March 7, 2011 to purchase a total of 5,432,120 shares of
common stock at $1.82 per share remained outstanding.  Following the
August 2009 Private Placement, the number of these outstanding warrants was
increased to 5,559,674 and the exercise price was reduced to $1.78, as a result
of anti-dilution provisions in the warrants.





Common
Stock Warrants—The
following table summarizes information with regard to outstanding warrants
issued in connection with equity and debt financings as of September 30,
2009.





Offering
                  
                  Outstanding
                    (as adjusted)
                  
                  
                  Exercise
                    Price
                    (as adjusted)
                  
                  Expiration Date2005
      Bridge Loans
                  
                  
                  720,000
                  
                  
                  $
                  0.625
                  
                  April
      1, 20102005
      PIPE - Placement agents and finders
                  
                  
                  762,810
                  
                  
                  $
                  0.65
                  
                  August
      9, 2010Series
      A Preferred:Investors
      – September 30, 2005 closing
                  
                  
                  909,090
                  
                  
                  $
                  0.65
                  
                  September
      30, 2010Investors
      – October 3, 2005 closing
                  
                  
                  60,606
                  
                  
                  $
                  0.65
                  
                  October
      3, 20102006
      PIPE – Investors and placement agents
                  
                  
                  5,559,674
                  
                  
                  $
                  1.78
                  
                  March
      7, 2011Series
      B Preferred:Investors
                  
                  
                  7,500,000
                  
                  
                  $
                  0.65
                  
                  December
      31, 2015Placement
      agents
                  
                  
                  900,000
                  
                  
                  $
                  1.25
                  
                  May
      2, 2012Series
      C Exchange
                  
                  
                  1,333,333
                  
                  
                  $
                  1.25
                  
                  May
      2, 2012Series
      D Preferred
                  
                  
                  4,365,381
                  
                  
                  $
                  0.65
                  
                  December
      31, 2015Series
      E Preferred
                  
                  
                  9,230,769
                  
                  
                  $
                  0.65
                  
                  December
      31, 2015August
      2009 Private Placement
                  
                  
                  1,856,062
                  
                  
                  $
                  0.66
                  
                  December
      31, 2015Total
                  
                  
                  33,197,725





During
the nine months ended September 30, 2009, the Company issued 79,028 shares of
common stock in connection with the cashless exercise of warrants to purchase
283,333 shares of the Company’s common stock.  The warrants had an
expiration date of August 9, 2010 and an exercise price of $0.65 per share. The
warrants had been recorded as a derivative liability. Upon exercise, $115,000
was reclassified from derivative liability to paid-in capital.





Other
than those described above, there have been no warrant exercises through
September 30, 2009.





13




6.
            STOCK-BASED
      COMPENSATION




The
following table summarizes amounts charged to expense for stock-based
compensation related to employee and director stock option grants and
stock-based compensation recorded in connection with stock options granted to
non-employee consultants:





Three months ended
                      September 30,
                    
                    
                    Nine months ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Employee
      and director stock option grants:Research
      and development
                    
                    $
                    34,953
                    
                    
                    $
                    21,049
                    
                    
                    $
                    106,500
                    
                    
                    $
                    135,333General
      and administrative
                    
                    
                    62,130
                    
                    
                    
                    57,476
                    
                    
                    
                    219,449
                    
                    
                    
                    174,02897,083
                    
                    
                    
                    78,525
                    
                    
                    
                    325,949
                    
                    
                    
                    309,361Non-employee
      consultants stock option grants and restricted stock
    awards:Research
      and development
                    
                    
                    32,825
                    
                    
                    
                    (4,976
                    )
                    
                    
                    111,658
                    
                    
                    
                    4,339General
      and administrative
                    
                    
                    13,163
                    
                    
                    
                    (288
                    )
                    
                    
                    65,554
                    
                    
                    
                    16,59645,988
                    
                    
                    
                    (5,264
                    )
                    
                    
                    177,212
                    
                    
                    
                    20,935Total
      stock-based compensation
                    
                    $
                    143,071
                    
                    
                    $
                    73,261
                    
                    
                    $
                    503,161
                    
                    
                    $
                    330,296





Determining
Fair Value





The
following table summarizes weighted-average values and assumptions used for
options granted to employees, directors and consultants in the periods
indicated:





Nine Months
                      Ended
                      September 30,
                      2008Volatility
                    
                    
                    80
                    %Weighted-average
      volatility
                    
                    
                    80
                    %Risk-free
      interest rate
                    
                    
                    3.14
                    %Expected
      life (years)
                    
                    
                    5Dividend
                    
                    
                    0Weighted-average
      exercise price
                    
                    $
                    0.60Weighted-average
      grant-date fair value
                    
                    $
                    0.39





There
were no stock option grants during the nine months ended September 30, 2009 or
the three months ended September 30, 2008.





A summary
of stock option activity is as follows:





Options
                              Outstanding
                            
                            
                            Weighted
                              Average
                              Exercise Price
                            
                            
                            Weighted
                              Average
                              Remaining
                              Contracted
                              Term in
                              Years
                            
                            
                            Aggregate
                              Intrinsic
                              ValueOutstanding
      at December 31, 2008
                            
                            
                            7,279,825
                            
                            
                            $
                            0.60
                            
                            
                            
                            7.9
                            
                            
                            $
                            989,718Options
      granted
                            
                            
                            —Outstanding
      at September 30, 2009
                            
                            
                            7,279,825
                            
                            
                            $
                            0.60
                            
                            
                            
                            7.1
                            
                            
                            $
                            3,333,459Exercisable
      at September 30, 2009
                            
                            
                            4,692,732
                            
                            
                            $
                            0.67
                            
                            
                            
                            6.1
                            
                            
                            $
                            2,213,727





The
aggregate intrinsic value of options outstanding is calculated based on the
positive difference between the closing market price of the Company’s common
stock at the end of the respective period and the exercise price of the
underlying options.





As of
September 30, 2009, there was approximately $554,000 of total unrecognized
compensation cost related to unvested stock-based compensation arrangements. Of
this total amount, 19%, 54% and 27% are expected to be recognized during
2009, 2010 and 2011, respectively.  The Company expects 2,587,093 in
unvested options to vest in the future.  The weighted-average
grant-date fair value of vested and unvested options outstanding at September
30, 2009 was $0.41 and $0.30, respectively.


14





In
January 2009, the Company modified the terms of options to purchase 40,000
shares of common stock held by two employees to vest all unvested options and to
extend the expiration dates of the options. The modification was made in
connection with the termination of the two employees to reduce costs. During the
nine months ended September 30, 2009, incremental stock-based compensation
expense of $8,000 was recorded in connection with the modification of the option
terms.





7.
            NET
      LOSS PER SHARE





Basic net
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock and the dilutive potential common stock
equivalents then outstanding. Potential common stock equivalents consist of
stock options, warrants and convertible preferred stock and accumulated
dividends.  Since the Company has a net loss for all periods
presented, the inclusion of common stock equivalents in the computation would be
antidilutive. Accordingly, basic and diluted net loss per share are the
same.




The
following potentially dilutive securities have been excluded from the
computation of diluted net loss per share since their inclusion would be
antidilutive:




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Stock
      options
                  
                  
                  7,279,825
                  
                  
                  
                  5,154,825
                  
                  
                  
                  7,279,825
                  
                  
                  
                  5,154,825Warrants
                  
                  
                  33,197,725
                  
                  
                  
                  28,102,033
                  
                  
                  
                  33,197,725
                  
                  
                  
                  28,102,033Conversion
      of preferred stock
                  
                  
                  53,589,726
                  
                  
                  
                  36,829,192
                  
                  
                  
                  53,589,726
                  
                  
                  
                  36,829,192





8.
            INCOME
      TAXES





The
Company accounts for income taxes in accordance with the Income Taxes Topic of
the FASB ASC. Under this guidance, deferred tax assets or liabilities are
computed based on the difference between the financial-statement and income-tax
basis of assets and liabilities, and net operating loss carryforwards, using the
enacted tax rates. Deferred income tax expense or benefit is based on changes in
the asset or liability from period to period. The Company did not record a
provision or benefit for federal, state or foreign income taxes for the
three and nine months ended September 30, 2009 because the Company has
experienced losses since inception. The Company has not recorded deferred tax
assets as their realization is uncertain.





9.
            SUBSEQUENT
      EVENTS





Results
of Special Meeting of Shareholders





Increase
in Authorized Shares of Common Stock





On
November 3, 3009, the Company held a special meeting in lieu of annual meeting
of stockholders.  At the meeting, the Company’s stockholders approved
an amendment to the certificate of incorporation to increase the total number of
authorized shares of the Company’s common stock by 75 million shares, from 150
million to 225 million.  Following the adjournment of the meeting, the
amendment was filed with the Secretary of State of Delaware, and it went into
effect on November 3, 2009.





Re-Election
of Directors; Amendment to 2006 Stock Option Plan





In
addition to the approval of the amendment of the certificate of incorporation as
described above, the Company’s  stockholders re-elected each incumbent
member of the board of directors and approved an amendment to the
Company’s  2006 Stock Incentive Plan to increase the shares of common
stock authorized under the plan by 5 million, from 5 million to 10
million.  The amendment to the 2006 Stock Incentive Plan became
effective immediately upon its approval by the stockholders.


15





Conversion
of Preferred Stock




On
November 10, 2009, 5.2 shares of the Company’s Series E preferred stock, having
an aggregate stated value of $260,000, and accumulated dividends thereon, were
converted into 426,999 shares of common stock.




Final
Closing on August 2009 Private Placement





On
November 10, 2009, the Company completed the final closing under the August 2009
Purchase Agreement and sold Purdue 8,333,334 shares of Novelos common stock and
warrants to purchase 2,916,668 shares of Novelos common stock for gross proceeds
of $5,500,000.  The terms of the August 2009 Purchase Agreement are
described in Note 5.




The
issuance of shares in the final closing resulted in anti-dilution adjustments to
certain warrants.  Pursuant to their terms, the outstanding warrants
were increased by a total of 191,018 shares and their exercise price was
decreased to $1.72 from $1.78.


16


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




Forward-Looking
Statements




This
quarterly report on Form 10-Q includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
we refer to as the Exchange Act. For this purpose, any statements contained
herein regarding our strategy, future operations, financial position, future
revenues, projected costs, prospects, plans and objectives of management, other
than statements of historical facts, are forward-looking statements. The words
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,”
“projects,” “will,” “would” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We cannot guarantee that we actually will achieve the
plans, intentions or expectations disclosed in our forward-looking statements.
There are a number of important factors that could cause actual results or
events to differ materially from those disclosed in the forward-looking
statements we make. These important factors include our significant accounting
estimates, such as those for unbilled contract service fees and amounts due to
clinical research organizations, clinical investigators and contract
manufacturers, the risk factors set forth below under the caption “Risk Factors”
and the risk factors set forth in Item 1A of our annual report for the year
ended December 31, 2008 on Form 10-K, which was filed with the Securities and
Exchange Commission (“SEC”) on March 30, 2009. Although we may elect to update
forward-looking statements in the future, we specifically disclaim any
obligation to do so, even if our estimates change, and readers should not rely
on those forward-looking statements as representing our views as of any date
subsequent to the date of this quarterly report.





Overview




We are a
biopharmaceutical company, established in 1996, commercializing oxidized
glutathione-based compounds for the treatment of cancer and
hepatitis.




NOV-002,
our lead compound, is currently in Phase 3 development for non-small cell lung
cancer.  NOV-002 is intended for use in combination with chemotherapy
to act as a chemopotentiator  and chemoprotectant.  Three
separate Phase 2 trials demonstrated clinical activity and safety of NOV-002 in
combination with chemotherapy in non-small cell lung cancer.  In May
2006, we finalized a Special Protocol Assessment (SPA) with the FDA for a single
pivotal Phase 3 trial in advanced non-small cell lung cancer in combination with
first-line chemotherapy, and received Fast Track designation in August 2006.
Patient enrollment commenced in November 2006 and the enrollment target was
reached in March 2008.  The primary endpoint of the Phase 3 trial is
increased median overall survival, to be measured following the occurrence of
725 events (deaths).  We anticipate that results for this trial will
be available in early 2010.




NOV-002
is also being developed to treat early-stage breast cancer. In June 2007 we
commenced enrollment in a U.S. Phase 2 neoadjuvant breast trial, which is
ongoing at The University of Miami to evaluate the ability of NOV-002 to enhance
the effectiveness of chemotherapy.  As presented at the San Antonio
Breast Cancer Symposium (December 2008), six pathologic complete responses
occurred in the first 15 women (40%) who have completed chemotherapy and
undergone surgery, which is much greater than the historical control of less
than 20% in HER-2 negative patients.  Furthermore, patients
experienced decreased hematologic toxicities.




NOV-002
is also being developed to treat chemotherapy-resistant ovarian
cancer.  In a U.S. Phase 2 chemotherapy-resistant ovarian cancer trial
at Massachusetts General Hospital and Dana-Farber Cancer Institute from July
2006 through May 2008, NOV-002 (plus carboplatin) slowed progression of the
disease in 60% of evaluable patients (nine out of 15 women). The median
progression-free survival was 15.4 weeks, almost double the historical control
of eight weeks. These results were presented at the American Society of Clinical
Oncology in May 2008.




Based on
results to-date, we intend to initiate several Phase 2 trials with NOV-002 in
these and possibly other cancer indications.  Our ability to initiate
these trials, and the timing of such trials, will depend on available funding,
principally from collaborative arrangements or the issuance of debt or equity
securities.




NOV-205,
our second compound, is intended for use as a hepatoprotective agent with
immunomodulating and anti-inflammatory properties.  A U.S. Phase 1b
clinical trial in patients who previously failed treatment with pegylated
interferon plus ribavirin was completed in December 2007.  Based on
favorable safety results of that trial, we plan to initiate a longer duration,
proof-of-concept trial in the first half of 2010 provided that we obtain the
additional funding necessary for that purpose.  However, there can be
no assurance that such funding will be available.


17




Both
compounds have completed clinical trials in humans and have been approved for
use in Russia, where they were originally developed.  We own all
intellectual property rights worldwide, excluding the Russian Territory, related
to compounds based on oxidized glutathione, including NOV-002 and NOV-205. Our
patent portfolio includes six U.S. issued patents, two European issued patents
and one Japanese issued patent.




We
entered into a collaboration agreement with Mundipharma to develop, manufacture
and commercialize NOV-002 in Europe (other than the Russian
Territory),  Asia (other than the Chinese Territory) and
Australia.  We have a collaboration agreement with Lee’s Pharm to
develop, manufacture and commercialize NOV-002 and NOV-205 in the Chinese
Territory.




Results
of Operations





Revenue.Revenue
consists of amortization of license fees received in connection with partner
agreements and income received from a grant from the U.S. Department of Health
and Human Services.





Research anddevelopment
expense.
Research and development expense consists of costs incurred in identifying,
developing and testing product candidates, which primarily consist of salaries
and related expenses for personnel, fees paid to professional service providers
for independent monitoring and analysis of our clinical trials, costs of
contract research and manufacturing and costs to secure intellectual
property.  We are currently developing two proprietary compounds,
NOV-002 and NOV-205.  To date, nearly all of our research and
development costs have been associated with our NOV-002 compound.





General and
administrative expense.  General and administrative expense
consists primarily of salaries and other related costs for personnel in
executive, finance and administrative functions. Other costs include facility
costs, insurance, costs for public and investor relations, directors’ fees and
professional fees for legal and accounting services.





Three
Months Ended September 30, 2009 and 2008





Revenue.During
the three months ended September 30, 2009 and 2008 we recognized $8,000 in
license fees in connection with our collaboration with Lee’s Pharm, which
commenced in December 2007.  Under the terms of our agreement with
Lee’s Pharm, the Company received a license fee of $500,000 in March 2008 and is
entitled to receive up to $1,700,000 in future milestone payments upon the
completion of development and marketing milestones by Lee’s
Pharm.  The $500,000 initial payment received is being amortized over
the estimated term of the agreement, 15 years.  During the three
months ended September 30, 2009 and 2008, we also recognized $5,000 and $27,000,
respectively, in grant revenue related to a grant received from the U.S.
Department of Health and Human Services. The related costs are included as a
component of research and development expense.




Research and
Development.   Research and development expense for the
three months ended September 30, 2009 was $1,766,000, compared to $1,972,000 for
the same period in 2008. The $206,000, or 10%, decrease in research and
development expense was due to a combination of factors.  In March
2008, we reached the enrollment target for our Phase 3 clinical trial of
NOV-002, and an increasing number of patients completed their treatment regimen
throughout 2008.   As a result, certain clinical costs have
leveled off or further declined. Contract research services and other clinical
activities such as those related to clinical research organizations, consultants
and central laboratory services and investigator payments decreased by
$244,000.  Salaries and overhead costs decreased by
$58,000.  These decreases were offset by a $52,000 increase in stock
compensation expense and a $44,000 increase in drug manufacturing and
distribution costs as the Company prepares for expanded manufacturing activities
associated with possible regulatory filings in 2010.





General and
Administrative.   General and administrative expense for
the three months ended September 30, 2009 was $546,000, compared to $622,000 for
the same period in 2008. The $76,000, or 12%, decrease was due to a $55,000
decrease in salaries and overhead and a $39,000 decrease in professional fees.
These decreases were a result of actions taken to reduce discretionary spending
in order to conserve cash. These decreases were offset by a $18,000 increase in
stock-based compensation.





Interest
Income.    Interest income for the three months ended
September 30, 2009 was $0 compared to $21,000 for the same period in
2008.  During the three months ended September 30, 2009, our cash was
on deposit in a non-interest bearing transactions account that is fully insured
by the FDIC.


18





Loss onDerivatives – Effective
January 1, 2009, we adopted the guidance of FASB ASC 815-40, Derivatives and Hedging. As a
result of this adoption, we recorded a loss on derivatives of $447,000 during
the three months ended September 30, 2009. This amount represents the increase
in fair value, during the three months ended September 30, 2009, of outstanding
warrants which contain “down-round” anti-dilution provisions, whereby the number
of shares for which the options are exercisable and/or the exercise price of the
warrants is subject to change in the event of certain issuances of stock at
prices below the then-effective exercise prices of the warrants. During the
three months ended September 30, 2009, an aggregate of 2,084,308 shares of the
Company’s common stock with a fair value of $1,626,000 were issued in exchange
for the tender of certain of these warrants.  The difference of
$517,000 between the fair value of the warrants at the date of exchange and the
fair value of the common stock issued to settle the derivative liability has
been included as a component of the loss on derivatives in the three months
ended September 30, 2009.





Preferred Stock Dividends.During the
quarter ended September 30, 2009, we accrued $843,000 in dividends with respect
to our Series C and E preferred stock.  During the three months ended
September 30, 2009, preferred stock dividends accrued on shares of Series E
preferred stock totaling $87,000 and preferred stock dividends accrued on shares
of Series C preferred stock totaling $14,000 were converted into shares of
common stock.  At September 30, 2009, accrued dividends totaling
$2,412,000 remain unpaid.




During
the three months ended September 30, 2008 we accrued $465,000 of dividends
due to our Series D preferred stockholders and accrued $65,000 in dividends due
to our Series C preferred stockholders.




The
deemed dividends, cash dividends and accrued dividends have been included in the
calculation of net loss attributable to common stockholders of $3,586,000, or
$0.07 per share, for the three months ended September 30, 2009 and $3,065,000 or
$0.07 per share, for the three months ended September 30, 2008.  The
deemed dividends and cash dividends are excluded from our net loss (from
operating activities) of $2,743,000, or $0.06 per share, for the three months
ended September 30, 2009 and $2,535,000, or $0.06 per share, for the three
months ended September 30, 2008.




Nine
Months Ended September 30, 2009 and 2008





Revenue.During
the nine months ended September 30, 2009 and 2008, we recognized $25,000 in
license fees in connection with our collaboration agreement with Lee’s
Pharm.  During the nine months ended September 30, 2009 and 2008, we
also recognized $52,000 and $65,000, respectively, in grant revenue related to a
grant received from the U.S. Department of Health and Human Services. The
related costs are included as a component of research and development
expense.




Research and
Development.    Research and development expense for
the nine months ended September 30, 2009 was $5,138,000, compared to $12,929,000
for the same period in 2008. The $7,791,000, or 60%, decrease in research and
development expense was due to a combination of factors.  In March
2008, we reached the enrollment target for our Phase 3 clinical trial of
NOV-002, and an increasing number of patients completed their treatment regimen
throughout 2008.   As a result, certain clinical costs have
leveled off or declined. Contract research services such as those related to
clinical research organizations, consultants and central laboratory services
decreased by $3,115,000.  Clinical investigator expenses, which are
affected by the number of patients that remain on treatment, decreased by
$2,406,000.  The cost of chemotherapy drug to be provided to patients
in Europe decreased by $1,728,000 and drug manufacturing and distribution costs
(including storing and shipping chemotherapy drug) decreased by $416,000.
Salaries and overhead costs decreased by $204,000.  These decreases
were offset by a $78,000 increase in stock compensation
expense.





General and
Administrative.    General and administrative expense
for the nine months ended September 30, 2009 was $1,529,000. We recorded general
and administrative expense of $1,602,000 for the same period in 2008. However,
during the nine months ended September 30, 2008 we recorded a $404,000 credit to
account for a waiver of potential liquidated damages associated with
registration rights agreements.  We had previously accrued an estimate
for such damages in 2007. Without this $404,000 credit, general and
administrative expense during the nine months ended September 30, 2009 would
have been $2,006,000, representing a decrease of $477,000, or 24%, during the
nine months ended September 30, 2009 compared to the same period in the prior
year.  This decrease is due principally to a $303,000 decrease in
professional fees and a $268,000 decrease in salaries and overhead costs, which
were a result of actions taken to reduce discretionary spending in order to
conserve cash. The decrease was partially offset by an increase in stock-based
compensation of $94,000.


19





Interest
Income.    Interest income for the nine months ended
September 30, 2009 was $1,000 compared to $123,000 for the same period in
2008.  Beginning in March 2009, our cash was on deposit in a
non-interest bearing account that is fully insured by the
FDIC.





Loss onDerivatives. Effective
January 1, 2009, we adopted the guidance of FASB ASC 815-40, Derivatives and Hedgingand,
as a result, we recorded a loss on derivatives of $2,830,000 during the nine
months ended September 30, 2009. This amount represents the increase in fair
value, during the nine months ended September 30, 2009, of outstanding warrants
which contain “down-round” anti-dilution provisions whereby the number of shares
for which the options are exercisable and/or the exercise price of the warrants
is subject to change in the event of certain issuances of stock at prices below
the then-effective exercise prices of the warrants. During the nine months ended
September 30, 2009, an aggregate of 2,084,308 shares of the Company’s common
stock with a fair value of $1,626,000 were issued in exchange for the tender of
certain of these warrants.  The difference of $517,000 between the
fair value of the warrants at the date of exchange and the fair value of the
common stock issued to settle the derivative liability has been included as a
component of the loss on derivatives in the nine months ended September 30,
2009.





Preferred Stock Dividends.During the
nine months ended September 30, 2009, we accrued $2,496,000 in dividends with
respect to our Series C, D and E preferred stock. On February 11, 2009, all
shares of Series D preferred stock and accrued dividends thereon totaling
$1,597,000 (including $202,000 that accrued during  2009 prior to the
exchange) were exchanged for approximately 445.5 shares of Series E preferred
stock. The remaining accrued dividends have not been paid. During the nine
months ended September 30, 2009, we also recorded deemed dividends on
preferred stock totaling $714,000.  This amount was recorded in
connection with the financing that occurred in February 2009 and represents the
value attributed to the modification of certain warrants less the net adjustment
required to record the newly issued shares of Series E preferred stock at fair
value, as described in Note 5 to the financial statements.





During
the nine months ended September 30, 2008, we paid cash dividends to Series B and
Series C preferred stockholders of $740,000 and accrued $1,060,000 of dividends
due to our Series B, C and D preferred stockholders.  During the nine
months ended September 30, 2008 we also recorded deemed dividends to preferred
stockholders totaling $4,417,000.  This amount represents the value
attributed to the reduction in exercise and conversion prices of the warrants
and preferred stock issued in May 2007 in connection with the financing that
occurred in April 2008.




The
deemed dividends, cash dividends and accrued dividends have been included in the
calculation of net loss attributable to common stockholders of $12,623,000, or
$0.27 per share, for the nine months ended September 30, 2009 and $20,194,000,
or $0.50 per share, for the nine months ended September 30, 2008.  The
deemed dividends and cash dividends are excluded from our net loss (from
operating activities) of $9,413,000, or $0.20 per share, for the nine months
ended September 30, 2009 and $14,312,000, or $0.36 per share, for the nine
months ended September 30, 2008.




Liquidity
and Capital Resources





We have
financed our operations since inception through the sale of securities and the
issuance of debt (which was subsequently paid off or converted into equity). As
of September 30, 2009, we had $5,567,000 in cash and
equivalents.




During
the nine months ended September 30, 2009, approximately $8,331,000 in cash was
used in operations, primarily due to a net loss of $9,413,000, a net decrease of
$1,965,000 in accounts payable and accrued liabilities and an increase in
prepaid expenses of $230,000.  Other changes in working capital used
cash of $78,000. The cash impact of the net loss was reduced by a $2,830,000
non-cash loss on derivatives, non-cash stock-based compensation expense of
$503,000 and depreciation and amortization of fixed assets totaling
$22,000.




During
the nine months ended September 30, 2009, we purchased $18,000 in fixed
assets.  We received net proceeds of $9,205,000 from the sale of our
Series E preferred stock and received net proceeds of $3,449,000 from the sale
of common stock.





The
primary endpoint of our Phase 3 clinical trial for NOV-002 in non-small cell
lung cancer is increased median overall survival, to be measured following the
occurrence of 725 events (deaths).  We anticipate that the results
from this trial will be available in early 2010.  On August 25, 2009,
we entered into the August 2009 Purchase Agreement with Purdue contemplating the
issuance and sale at two or more closings of up to 13,636,364 shares of our
common stock and warrants to purchase 4,772,728 shares of our common stock at an
exercise price of $0.66 per share, expiring December 31, 2015, for an aggregate
purchase price of $9,000,000.


20




At the
initial closing on August 25, 2009, the Company sold Purdue 5,303,030 shares of
common stock and a warrant to purchase 1,856,062 shares of common stock for
gross proceeds of $3,500,000.  At the final closing under the August
2009 Purchase Agreement on November 10, 2009, the Company sold Purdue 8,333,334
shares of Novelos common stock and warrants to purchase 2,916,668 shares of
Novelos common stock for gross proceeds of $5,500,000.  The August
2009 Purchase Agreement required us to adopt an expanded development and
regulatory plan for NOV-002 (the “Plan”) which contemplates substantial
expenditures through mid-2010 in addition to clinical development expenditures
previously contemplated for the completion of the Phase 3 trial.  We
are required to use proceeds from the sale of securities under the August 2009
Purchase Agreement for the expenditures identified in the Plan. We believe that
the available funds at September 30, 2009, plus the proceeds from the final
closing under the August 2009 Purchase Agreement, will allow us to operate
beyond the conclusion of the Phase 3 trial and into the third quarter of
2010.




The
completion of the Phase 3 clinical trial is likely to significantly affect our
ability to finance continued operations beyond the third quarter of
2010.  If the results are favorable, we believe we will be able to
obtain adequate funding to pursue its strategic objectives and clinical
development programs longer term.  If the results of the Phase 3
clinical trial are not favorable, we may be unable to obtain additional funding
and may be required to scale back administrative activities and clinical
development programs, or cease our operations entirely.  Furthermore,
adverse conditions in the capital markets globally may impair our ability to
obtain capital in a timely manner.




Item
      4.
            Controls
      and Procedures





Evaluation of Disclosure
Controls and Procedures





Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of September 30, 2009.  Disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, are controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms and that such information is accumulated and communicated to our
management, including our principal executive and financial officers, to allow
timely decisions regarding required disclosures.





Based on
the evaluation of our disclosure controls and procedures as of September 30,
2009, our Chief Executive Officer and our Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were operating
effectively.





Change in Internal Control
over Financial Reporting





The
Company’s management, in connection with its evaluation of internal controls
(with the participation of the Company’s principal executive officer and
principal financial officer), did not identify any change in internal control
over the financial reporting process that occurred during the Company’s third
quarter of 2009 that would have materially affected, or would have been
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





Limitations on Effectiveness
of Controls





In
designing and evaluating our disclosure controls and procedures, our management
recognizes that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
on certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.




21


PART
II. OTHER INFORMATION




Item
      1.
            Legal
      Proceedings




None.





Item
      1A.
            Risk
      Factors





We
will require additional capital to continue operations beyond the third quarter
of 2010.




The
report from our independent registered public accounting firm dated March 17,
2009 and included with our annual report on Form 10-K indicated that factors
existed that raised substantial doubt about our ability to continue as a going
concern.




The
primary endpoint of our Phase 3 clinical trial for NOV-002 in non-small cell
lung cancer is increased median overall survival, to be measured following the
occurrence of 725 events (deaths).  We anticipate that the
results from this trial will be available in early 2010.  On August
25, 2009, we entered into a Securities Purchase Agreement (the “August 2009
Purchase Agreement”) with Purdue Pharma L.P. (“Purdue”) contemplating the
issuance and sale at two or more closings of up to 13,636,364 shares of our
common stock and warrants to purchase approximately 4,772,728 shares of our
common stock at an exercise price of $0.66 per share, expiring December 31,
2015, for an aggregate purchase price of $9,000,000.  At the initial
closing on August 25, 2009, we sold Purdue 5,303,030 shares of common stock and
a warrant to purchase 1,856,062 shares of common stock for gross proceeds of
$3,500,000.  At the final closing under the August 2009 Purchase
Agreement on November 10, 2009, we sold Purdue 8,333,334 shares of our common
stock and warrants to purchase 2,916,668 shares of our common stock for gross
proceeds of $5,500,000.  The August 2009 Purchase Agreement required
us to adopt an expanded development and regulatory plan for NOV-002 (the
“Plan”), which contemplates substantial expenditures through mid-2010 in
addition to clinical development expenditures previously contemplated for the
completion of the Phase 3 trial.  We are required to use proceeds from
the sale of securities under the August 2009 Purchase Agreement for the
expenditures identified in the Plan.  We believe that the available
funds at September 30, 2009, plus the proceeds from the final closing under the
August 2009 Purchase Agreement, will allow us to operate beyond the conclusion
of the Phase 3 trial and into the third quarter of 2010, as set forth in the
Plan.




Our
ability to execute our operating plan beyond the third quarter of 2010 is
dependent on our ability to obtain additional capital (including through the
sale of equity and debt securities at any time and by entering into
collaborative arrangements for licensing rights in North America) to fund our
development activities. We plan to pursue these alternatives, but there can be
no assurance that we will obtain the additional capital necessary to fund our
business beyond the third quarter of 2010.  The timing and content of
the Phase 3 clinical trial results will affect our projected cash requirements
and our ability to obtain capital.  If the results are favorable, we
believe we will be able to obtain adequate funding to pursue our strategic
objectives and clinical development programs longer term.  If the
results of our Phase 3 clinical trial are not favorable, we may be unable to
obtain additional funding, and we may be required to scale back our
administrative activities and clinical development programs, or cease our
operations entirely.  Furthermore, adverse conditions in the capital
markets globally may impair our ability to obtain funding in a timely
manner.




Purdue
has obtained certain rights that may discourage third parties from entering into
discussions with us to acquire rights to NOV-002 for the United
States.




Until
Purdue receives certain information related to our Phase 3 clinical trial in
non-small cell lung cancer, Novelos is prohibited from negotiating with any
party other than Purdue for the license or other acquisition of rights to
register, develop, make, have made, use, warehouse, promote, market, sell, have
sold, import, distribute and offer for sale NOV-002 (collectively “NOV-002
Rights”) in the United States.  Purdue has been granted a right of
first refusal on bona fide offers to obtain NOV-002 Rights in the United States
received from third parties and approved by our board of
directors.  Under Purdue’s right of first refusal, Purdue will have 30
days to enter into a definitive agreement with Novelos on terms representing the
same economic benefit for Novelos as in the third-party offer.  The
right of first refusal terminates upon specified business
combinations.  Novelos has entered into separate letter agreements
with Mundipharma and an independent associated company providing for a
conditional exclusive right to negotiate for, and a conditional right of first
refusal with respect to third party offers to obtain NOV-002 Rights (i) for
Mexico, Central America, South America and the Caribbean and (ii) for Canada,
respectively.  The existence of these rights may discourage other
possible strategic partners from entering into discussions with us to obtain
NOV-002 Rights in North and South America.


22




We
are prohibited from taking certain actions and entering into certain
transactions without the consent of holders of our Series E preferred
stock.





For as
long as any shares of Series E preferred stock remain outstanding we are
prohibited from taking certain actions or entering into certain transactions
without the prior consent of specific holders of outstanding shares of Series E
preferred stock (currently consisting of the Xmark affiliated funds, the OrbiMed
affiliated funds and Purdue).  We are prohibited from paying dividends
to common stockholders, amending our certificate of incorporation or by-laws,
issuing any equity security or any security convertible into or exercisable for
any equity security at a price of $0.65 or less or with rights senior to the
Series E preferred stock (except for certain exempted issuances), increasing the
number of shares of Series E preferred stock or issuing any additional shares of
Series E preferred stock other than the 735 shares designated in the Series E
Certificate of Designations, or changing the number of our
directors.  We are also prohibited from entering into certain
transactions such as:





·
              selling
      or otherwise disposing of all or substantially all of our assets (and in
      the case of licensing, any material intellectual property) or entering
      into a merger or consolidation with another company unless we are the
      surviving corporation, the Series E preferred stock remains outstanding
      and there are no changes to the rights and preferences of the Series E
      preferred stock;


·
              redeeming
      or repurchasing any capital stock other than Series E preferred stock or
      the related warrants; or


·
              incurring
      any new debt for borrowed money in excess of
  $500,000.





Even
though our board of directors may determine that any of these actions are in the
best interest of the Company or our shareholders, we may be unable to complete
them if we do not get the approval of specific holders of the outstanding shares
of Series E preferred stock.  The interests of the holders of Series E
preferred stock may differ from those of stockholders
generally.  Moreover, the rights of first refusal and the exclusive
negotiation rights granted to Purdue and its independent associated companies
under the August 2009 Purchase Agreement and the collaboration agreement with
Mundipharma (our collaborator on most non-U.S. development, manufacturing and
commercialization of NOV-002) have the potential of creating situations where
the interests of the Company and those of Purdue may conflict.  If we
are unable to obtain consent from each of the holders identified above, we may
be unable to complete actions or transactions that our board of directors has
determined are in the best interest of the Company and its
shareholders.





We
have not paid dividends to preferred stockholders totaling $2,412,000 as of
September 30, 2009 and we may be unable to pay dividends to preferred
stockholders when due in future periods.





Our
ability to pay cash dividends on stated future dividend payment dates will be
dependent on a number of factors including the timing of future financings and
the amount of net losses in future periods. We anticipate that future dividends
on Series E preferred stock will be paid by issuing shares of common stock or
additional shares of Series E preferred stock, which will result in additional
dilution to existing shareholders. We anticipate that the accrued unpaid
dividend on our Series C preferred stock ($668,000 at September 30, 2009) will
continue to accumulate.





Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds





On
September 30, 2009, we issued 114,410 shares of our common stock upon conversion
of 5 shares of our Series C preferred stock, having an aggregate stated value of
$60,000, and accumulated undeclared dividends thereon





On
September 29, 2009 we issued 755,809 shares of our common stock upon conversion
of 9.29349375 shares of our Series E preferred stock, having an aggregate stated
value of $464,674, and accumulated undeclared dividends thereon.





On August
25, 2009, we sold 5,303,030 shares of our common stock and warrants to purchase
1,856,062 shares of common stock at an exercise price of $0.66 per share,
receiving gross proceeds of approximately $3,500,000.


23





On August
21, 2009, we issued 2,084,308 shares of common stock to holders of common stock
warrants issued in a March 2006 financing transaction in exchange for
outstanding warrants to purchase 6,947,728 shares of common stock at an exercise
price of $1.82 per share.  The issuance was made pursuant to an
exchange agreement with each warrant holder and was exempt from registration
under Section 3(a)(9) of the Securities Act.





On August
4, 2009, we issued 1,684,845 shares of our common stock upon conversion of 21
shares of our Series E preferred stock, having an aggregate stated value of
$1,050,000 and accumulated undeclared dividends thereon.





On July
2, 2009, we issued 72,916 shares of our common stock in connection with the
cashless exercise of warrants to purchase an aggregate of 262,503 shares of our
common stock.  The warrants had an expiration date of August 2, 2010
and an exercise price of $0.65 per share.





On July
1, 2009, we issued 696,465 shares of our common stock upon conversion of 8.75
shares of our Series E preferred stock, having an aggregate stated value of
$437,500, and accumulated undeclared dividends thereon.





Item
      3.
            Defaults
      Upon Senior Securities





None.




Item
      4.
            Submission
      of Matters to a Vote of Security
Holders




None.




Item
      5.
            Other
      Information





Amendment
to By-laws





Effective
August 20, 2009, our by-laws were amended in order to implement required notice
periods and a protocol for calling shareholder meetings and addressing
shareholder proposals.  Among other things, the amendment to our
by-laws established a procedure that a stockholder of Novelos must follow in
order to nominate a candidate for election to our board of
directors.  Under our by-laws, as amended, in order to make a
nomination, a stockholder must be a record holder entitled to vote on the
election to which such nomination pertains, and must also provide advance notice
to our corporate secretary not less than 90 days nor more than 120 days prior to
the anniversary of the last annual meeting (subject to the limited exceptions
set forth in the bylaws).  This summary of the notice provisions of
our by-laws relating to the nomination of directors is only a summary and is
qualified in its entirety by reference to our amended by-laws, which are filed
as Exhibit 3.8 to this quarterly report and are incorporated herein by
reference.





Final
Closing on August 2009 Private Placement





On
November 10, 2009, we completed the final closing under the August 2009 Purchase
Agreement with Purdue and sold Purdue 8,333,334 shares of our common stock and
warrants to purchase 2,916,668 shares of our common stock at an exercise price
of $0.66 per share, expiring December 31, 2015, for gross proceeds of
$5,500,000.  This sale was exempt from registration under the
Securities Act of 1933 by virtue of Section 4(2) thereof.  The terms of the
August 2009 Purchase Agreement are described in Note 5 to the financial
statements.


24


Item
      6.
            Exhibits





Filed
                              with
                              this
                            
                            Incorporated by ReferenceExhibit
                              No.
                            
                            Description
                            
                            Form
                              10-Q
                            
                            Form
                            
                            FilingDate
                            
                            Exhibit
                              No.2.1
                            
                            Agreement
      and plan of merger among Common Horizons, Inc., Nove Acquisition, Inc. and
      Novelos Therapeutics, Inc. dated May 26, 2005
                            
                            
                            
                            8-K
                            
                            June
      2, 2005
                            
                            99.22.2
                            
                            Agreement
      and plan of merger between Common Horizons and Novelos Therapeutics, Inc.
      dated June 7, 2005
                            
                            
                            
                            10-QSB
                            
                            August
      15, 2005
                            
                            2.23.1
                            
                            Amended
      and Restated Certificate of Incorporation filed as Exhibit A to the
      Certificate of Merger merging Nove Acquisition, Inc. with and into Novelos
      Therapeutics, Inc. dated May 26, 2005
                            
                            
                            
                            10-QSB
                            
                            August
      10, 2007
                            
                            3.13.2
                            
                            Certificate
      of Merger merging Common Horizons, Inc. with and into Novelos
      Therapeutics, Inc. dated June 13, 2005
                            
                            
                            
                            10-QSB
                            
                            August
      10, 2007
                            
                            3.23.3
                            
                            Certificate
      of Correction dated March 3, 2006
                            
                            
                            
                            10-QSB
                            
                            August
      10, 2007
                            
                            3.33.4
                            
                            Certificate
      of Amendment to Amended and Restated Certificate of Incorporation dated
      July 16, 2007
                            
                            
                            
                            10-QSB
                            
                            August
      10, 2007
                            
                            3.43.5
                            
                            Certificate
      of Designations of Series C  cumulative convertible preferred
      stock
                            
                            
                            
                            10-QSB
                            
                            August
      10, 2007
                            
                            3.63.6
                            
                            Certificate
      of Designations of Series E  convertible preferred
      stock
                            
                            
                            
                            8-K
                            
                            February
      18, 2009
                            
                            4.13.7
                            
                            Certificate
      of Amendment to Amended and Restated Certificate of Incorporation dated
      November 3, 2009
                            
                            X3.8
                            
                            Amended
      and Restated By-Laws
                            
                            
                            
                            8-K
                            
                            August
      26, 2009
                            
                            3.110.1
                            
                            Form
      of Warrant Exchange Agreement dated August 21, 2009
                            
                            
                            
                            8-K
                            
                            August
      26, 2009
                            
                            10.510.2
                            
                            Securities
      Purchase Agreement dated August 25, 2009
                            
                            
                            
                            S-1
                            
                            September
      15, 2009
                            
                            10.4110.3
                            
                            Registration
      Rights Agreement dated August 25, 2009
                            
                            
                            
                            S-1
                            
                            September
      15, 2009
                            
                            10.4210.4
                            
                            Common
      Stock Purchase Warrant dated August 25,2009
                            
                            
                            
                            S-1
                            
                            September
      15, 2009
                            
                            10.4310.5
                            
                            Letter
      Agreement with LP Clover Limited dated August 25, 2009
                            
                            
                            
                            S-1
                            
                            September
      15, 2009
                            
                            10.4410.6
                            
                            Letter
      Agreement with Mundipharma International Corporation Limited dated August
      25, 2009
                            
                            
                            
                            S-1
                            
                            September
      15, 2009
                            
                            10.4531.1
                            
                            Certification
      of the chief executive officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                            
                            X31.2
                            
                            Certification
      of the chief financial officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                            
                            X32.1
                            
                            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
                            
                            X




25


SIGNATURES




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.




NOVELOS
      THERAPEUTICS, INC.Date:  November
      16, 2009
                By:
                /s/ Harry S. PalminHarry
      S. PalminPresident
      and Chief Executive
Officer


26


EXHIBIT
INDEX




Filed
                                          with
                                          this
                                        
                                        Incorporated
      by ReferenceExhibit
                                          No.
                                        
                                        Description
                                        
                                        Form
                                          10-Q
                                        
                                        Form
                                        
                                        Filing Date
                                        
                                        Exhibit
                                          No.2.1
                                        
                                        Agreement
      and plan of merger among Common Horizons, Inc., Nove Acquisition, Inc. and
      Novelos Therapeutics, Inc. dated May 26, 2005
                                        
                                        
                                        
                                        8-K
                                        
                                        June
      2, 2005
                                        
                                        99.22.2
                                        
                                        Agreement
      and plan of merger between Common Horizons and Novelos Therapeutics, Inc.
      dated June 7, 2005
                                        
                                        
                                        
                                        10-QSB
                                        
                                        August
      15, 2005
                                        
                                        2.23.1
                                        
                                        Amended
      and Restated Certificate of Incorporation filed as Exhibit A to the
      Certificate of Merger merging Nove Acquisition, Inc. with and into Novelos
      Therapeutics, Inc. dated May 26, 2005
                                        
                                        
                                        
                                        10-QSB
                                        
                                        August
      10, 2007
                                        
                                        3.13.2
                                        
                                        Certificate
      of Merger merging Common Horizons, Inc. with and into Novelos
      Therapeutics, Inc. dated June 13, 2005
                                        
                                        
                                        
                                        10-QSB
                                        
                                        August
      10, 2007
                                        
                                        3.23.3
                                        
                                        Certificate
      of Correction dated March 3, 2006
                                        
                                        
                                        
                                        10-QSB
                                        
                                        August
      10, 2007
                                        
                                        3.33.4
                                        
                                        Certificate
      of Amendment to Amended and Restated Certificate of Incorporation dated
      July 16, 2007
                                        
                                        
                                        
                                        10-QSB
                                        
                                        August
      10, 2007
                                        
                                        3.43.5
                                        
                                        Certificate
      of Designations of Series C  cumulative convertible preferred
      stock
                                        
                                        
                                        
                                        10-QSB
                                        
                                        August
      10, 2007
                                        
                                        3.63.6
                                        
                                        Certificate
      of Designations of Series E  convertible preferred
      stock
                                        
                                        
                                        
                                        8-K
                                        
                                        February
      18, 2009
                                        
                                        4.13.7
                                        
                                        Certificate
      of Amendment to Amended and Restated Certificate of Incorporation dated
      November 3, 2009
                                        
                                        X3.8
                                        
                                        Amended
      and Restated By-Laws
                                        
                                        
                                        
                                        8-K
                                        
                                        August
      26, 2009
                                        
                                        3.110.1
                                        
                                        Form
      of Warrant Exchange Agreement dated August 21, 2009
                                        
                                        
                                        
                                        8-K
                                        
                                        August
      26, 2009
                                        
                                        10.510.2
                                        
                                        Securities
      Purchase Agreement dated August 25, 2009
                                        
                                        
                                        
                                        S-1
                                        
                                        September
      15, 2009
                                        
                                        10.4110.3
                                        
                                        Registration
      Rights Agreement dated August 25, 2009
                                        
                                        
                                        
                                        S-1
                                        
                                        September
      15, 2009
                                        
                                        10.4210.4
                                        
                                        Common
      Stock Purchase Warrant dated August 25,2009
                                        
                                        
                                        
                                        S-1
                                        
                                        September
      15, 2009
                                        
                                        10.4310.5
                                        
                                        Letter
      Agreement with LP Clover Limited dated August 25, 2009
                                        
                                        
                                        
                                        S-1
                                        
                                        September
      15, 2009
                                        
                                        10.4410.6
                                        
                                        Letter
      Agreement with Mundipharma International Corporation Limited dated August
      25, 2009
                                        
                                        
                                        
                                        S-1
                                        
                                        September
      15, 2009
                                        
                                        10.4531.1
                                        
                                        Certification
      of the chief executive officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                                        
                                        X
  27




Filed
                                                with
                                                this
                                              
                                              Incorporated
      by ReferenceExhibit
                                                No.
                                              
                                              Description
                                              
                                              Form
                                                10-Q
                                              
                                              Form
                                              
                                              Filing Date
                                              
                                              Exhibit
                                                No.31.2
                                              
                                              Certification
      of the chief financial officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                                              
                                              X32.1
                                              
                                              Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
                                              
                                              X




28