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TELK > SEC Filings for TELK > Form 10-Q on 8-Aug-2014All Recent SEC Filings

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Form 10-Q for TELIK INC


8-Aug-2014

Quarterly Report


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

Special Note Regarding Statements of Expected Future Performance

This Quarterly Report on Form 10-Q contains statements indicating expectations about future performance and other forward-looking statements that involve risks and uncertainties. We usually use words such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "future," "intend," "potential," or "continue" or the negative of these terms or similar expressions to identify forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our current intent, belief or expectation, primarily with respect to our operations and related industry developments. Examples of these statements include, but are not limited to, statements regarding the following: our future operating expenses, our future losses, our future expenditures for research and development, the sufficiency of our cash resources and ability to raise adequate funds in the future, the timing and implications of results of our Phase 2 clinical trials, the progress of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates using TRAP technology (our proprietary Target-Related Affinity Profiling technology), the potential of such product candidates to lead to the development of safer or more effective therapies, our ability to develop the technology derived from our collaborations, and our anticipated timing for filing additional Investigational New Drug applications, or INDs, with the FDA, or for the initiation or completion of Phase 1, Phase 2 or Phase 3 clinical trials for any of our product candidates, the rights granted to the holders of our Series A-1 convertible preferred stock, the rights granted to the holders of our Series B convertible preferred stock, our limited trading market and the quotation of our shares of common stock on the OTCQB marketplace, dilution to the holders of our common stock related to future issuances and our involvement in potential future litigation. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q.

The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 10, 2014.

TELIK, the Telik logo, TRAP, TELCYTA and TELINTRA are trademarks of Telik, Inc. All other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Overview

Telik has been engaged in the discovery and development of small molecule drugs. Our business strategy is to advance our drug product candidates through Phase 2 clinical studies, and to enter into a partnership with a pharmaceutical or biotechnology company to assist in further development and commercialization, license product candidates outside our therapeutic focus, and identify and develop additional drug product candidates.

As a consequence of the Merger, Telik's current technologies and product development candidates will be evaluated by MabVax to determine if additional effort and investment is warranted relative to the product opportunities at MabVax. No assurance can be given that any current technologies or product development candidates currently at Telik will continue in the combined company.

We have incurred significant net losses since inception and expect to incur losses for the foreseeable future as we continue our research and development activities. During the six months ended June 30, 2014, our loss from operations was $2.7 million and our net loss was $2.7 million. Net cash used in operations for the six months ended June 30, 2014 was $2.5 million and cash and cash equivalents at June 30, 2014 were $2.0 million. As of June 30, 2014, we had an accumulated deficit of $556.2 million.


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We are subject to risks common to biopharmaceutical companies, including the need for capital, risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, enforcement of patent and proprietary rights, potential competition and retention of key employees. In order for a product to be commercialized, it will be necessary for us to conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, obtain market acceptance and, in many cases, obtain adequate reimbursement from government and private insurers. We cannot provide assurance that we will ever generate revenues or achieve and sustain profitability in the future or obtain the necessary working capital for our operations.

Private Financing

On May 12, 2014, we entered into a securities purchase agreement to sell 1,250,000 shares of our Series B Convertible Preferred Stock at $2.00 per share for a total of $2.5 million along with warrants to purchase 625,000 shares of common stock at $3.33 per share to a group of private investors led by Hudson Bay. We received approximately $2.3 million in net proceeds from the sale of shares, after deducting related issuance costs, and used it to bridge us to the closing of the merger described below.

Merger Agreement

Concurrently on May 12, 2014, we entered into a merger agreement, or Merger Agreement, with MabVax Therapeutics, Inc., or MabVax, a privately held cancer immunotherapy company, or the Merger. On July 8, 2014, or the Closing Date, Telik and MabVax completed the Merger. As a result of the consummation of the Merger, as of the Closing Date, the former stockholders, option holders and warrant holders of MabVax own approximately 85% of the outstanding shares of Telik common stock on a fully diluted basis and the stockholders, option holders and warrant holders of Telik prior to the Merger owned approximately 15% of the outstanding shares of Telik common stock on a fully diluted basis and a change of control has occurred.

For accounting purposes, the Merger is treated as a "reverse acquisition" and MabVax is considered the accounting acquirer. Accordingly, MabVax will be reflected as the predecessor and acquirer in Telik's financial statements. Telik's financial statements for the periods ending from and after the Closing Date will reflect the historical financial statements of MabVax as Telik's historical financial statements, except for the legal capital which will reflect Telik's legal capital (common stock).

The combined company of Telik and MabVax, or the combined entity, is subject to risks common to biopharmaceutical companies, including the need for capital, risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, enforcement of patent and proprietary rights, potential competition and retention of key employees. In order for a product to be commercialized, it will be necessary for us to conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, obtain market acceptance and, in many cases, obtain adequate reimbursement from government and private insurers. We cannot provide assurance that we will ever generate revenues or achieve and sustain profitability in the future or obtain the necessary working capital for our operations.

We expect the quarterly and annual results of operations of the combined entity will fluctuate for the foreseeable future as we continue to identify and advance a number of potential drug candidates into clinical and preclinical development activities, including initiating the manufacturing of our lead antibody candidate and funding operations as we expand our infrastructure. The successful development of our drug product candidates is uncertain. As such, an accurate prediction of future results is difficult or impossible.


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Telik - Clinical Product Development

The clinical development of TELINTRA, a small molecule glutathione analog inhibitor of the enzyme glutathione S-transferase P1-1, was suspended in the third quarter of 2013. We have a Phase 3 placebo-controlled randomized registration trial of TELINTRA for the treatment of Low to Intermediate-1 risk MDS, using red-blood-cell transfusion independence as the endpoint, which was designed in accordance with the FDA's guidance. Telik will evaluate this product relative to others in its pipeline and a determination will be made as to whether the product warrants continued effort. Telik may seek a corporate partner or attempt to out license the program. Until such time as a determination on the potential of the project can be made, the plan to initiate a Phase 3 registration trial of TELINTRA is placed on hold.

Telik - Preclinical Drug Product Development

We have three small molecule compounds in our preclinical development program:
TLK60404- a small molecule compound inhibiting both Aurora kinase and VEGFR kinase, TLK60357- a novel, potent small molecule inhibitor of cell division and TLK60357- a potent VGFR kinase inhibitor that blocks the formation of new blood vessels in tumors. While these compounds display anticancer activity against human cancer cells, we have placed these development programs on hold until the combined company can evaluate these programs relative to others in our pipeline and make a determination as to whether any of the programs warrant continued effort. We may seek a corporate partner or attempt to out license any or all of these programs. Until such time as a determination on the potential of these programs can be made, these programs will continue to be placed on hold.

Nasdaq Listing Compliance

On November 14, 2013, we received a notice from The Nasdaq Stock Market LLC, or Nasdaq, indicating that we no longer satisfied the minimum $2,500,000 stockholders' equity requirement for continued listing on The Nasdaq Capital Market and providing us the opportunity to submit a plan to regain compliance with that requirement. On December 30, 2013, we submitted to Nasdaq a plan to regain compliance.

On January 9, 2014, following its review of the plan, we received a notice from Nasdaq that it had determined to delist our securities based on the stockholders' equity deficiency unless we request a hearing before The Nasdaq Listing Qualifications Panel, or the Panel. We requested a hearing, and a hearing before the Panel was held on February 20, 2014, at which time we presented our plan to evidence compliance with the requirements for continued listing on The Nasdaq Capital Market. On February 25, 2014, we received a notice from Nasdaq that the Panel had granted our request for continued listing on The Nasdaq Capital Market, provided we evidence compliance with the $2,500,000 stockholders' equity requirement by May 30, 2014.

On May 21, 2014, we received a notice from the Panel granting our request for continued listing on The Nasdaq Capital Market, provided that by July 8, 2014, we close the Merger and the combined company qualifies for initial listing on the Capital Market. Telik may also continue to be listed on The Nasdaq Capital Market by independently regaining compliance with the continued listing requirements of The Nasdaq Capital Market by July 8, 2014 through a financing or licensing transaction.

Pursuant to the terms of the Panel's decision and as disclosed above, on July 8, 2014, Telik completed the Merger, and the combined entity was required to evidence compliance with all applicable requirements for initial listing on The Nasdaq Capital Market upon completion of the merger, including the $4.00 minimum stock price requirement, or to otherwise evidence compliance with the requirements for continued listing on The Nasdaq Capital Market on a stand-alone basis. Due to the failure of Telik to obtain the approval of its stockholders of the 5 to 1 reverse stock split described in our proxy statement filed with the SEC on June 3, 2014, or the reverse split, the new


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combined company was not in a position to evidence full compliance with the terms of the Panel's decision dated May 21, 2014, to meet the July 8th deadline and the Panel issued a determination to suspend trading in the Company's securities on The Nasdaq Capital Market effective as of market open on July 10, 2014. Commencing on July 10, 2014, shares of our common stock began trading on the OTCQB marketplace under the symbol "TELK".

We have appealed the Panel's decision to the Nasdaq Listing and Hearing Review Council, or the Nasdaq Listing Council, requesting additional time to obtain the necessary votes to approve the reverse stock split and to demonstrate compliance with all applicable requirements for initial listing on The Nasdaq Capital Market, including the $4.00 minimum stock price requirement. As described in our proxy statement filed with the SEC on July 25, 2014, we scheduled a stockholder's meeting for August 20, 2014 soliciting stockholder approval for, among other items, the reverse split and an amendment to our amended and restated certificate of incorporation to change our name to MabVax Therapeutics Holdings, Inc. and to increase the authorized number of our common shares to a new total of 150,000,000 and our authorized number of preferred shares to a new total of 15,000,000.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates and judgments related to our operating costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates under different assumptions or conditions.

There has been no material change in our critical accounting policies and significant judgments and estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2013.

Results of Operations

Research and Development Expenses

Our research and development costs in the three and six months ended June 30, 2014 were primarily for the completion of all clinical study reports associated with the wind down of our clinical trials in 2013 including the filing of annual safety reports, drug storage and headcount related expenses.

Three Months Ended Six Months June 30, % Ended June 30, % 2014 2013 Change 2014 2013 Change

(In thousands, except percentages)

Research and development $ 81 $ 528 (85 )% $ 390 $ 1,314 (70 )%

The decrease of 85%, or $447,000, in research and development expenses for the three months ended June 30, 2014 compared to the same period in 2013, was primarily due to the following:

decreased costs of $345,000 associated with headcount reduction, reduced stock-based compensation of approximately $34,000 and a $48,000 decrease in allocated facility and IT costs as a result of our relocation to a smaller corporate office space in March 2013; and


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a decrease of approximately $20,000 in our phase 2 clinical studies for TELINTRA as we have closed out all our clinical sites.

The decrease of 70%, or $924,000, in research and development expenses for the six months ended June 30, 2014 compared to the same period in 2013, was primarily due to the following:

decreased costs of $567,000 associated with headcount reduction, reduced stock-based compensation of approximately $92,000 and a $125,000 decrease due to lower allocated facility and IT costs; and

a decrease of approximately $140,000 in our phase 2 clinical studies for TELINTRA as we have closed out all our clinical sites.

As a result of the consummation of the Merger, we expect future research and development expenditures of the combined company will increase as we advance our lead drug candidates into preclinical and clinical development activities including initiating manufacturing of our lead antibody candidate.

General and Administrative Expenses



                                             Three Months Ended                       Six Months Ended
                                                  June 30,                %               June 30,               %
                                              2014           2013      Change         2014         2013       Change
                                                               (In thousands, except percentages)

General and administrative $ 1,575 $ 859 83 % $ 2,334 $ 2,019 16 %

The increase in general and administrative expenses of 83%, or $716,000, for the three months ended June 30, 2014 compared to the same period in 2013, was primarily due to an increase in merger related legal and professional services expenses.

The increase in general and administrative expenses of 16%, or $315,000, for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to the following:

an increase in merger related legal and professional services expenses of $507,000;

partially offset by decreases of $129,000 related to stock-based compensation, and $63,000 in corporate administrative and facility related expenses.

As a result of the consummation of the Merger, we expect our future general and administrative expenditures to increase. While merger related expenses will have ended, the combined company will incur additional expenses related to being a public company. We expect the increase to be attributable to expanding our corporate infrastructure, increased legal expenses, increased insurance requirements, and fees related to regulatory filings.


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Stock-Based Compensation Expense

Employee stock-based compensation expense related to our share-based payment
awards was as follows:



                                                      Three Months Ended            Six Months Ended
                                                           June 30,                     June 30,
                                                     2014             2013        2014           2013
                                                                      (In thousands)
Research and development                           $      -          $   34      $    -        $      92
General and administrative                                 2             49            3             131

Stock-based compensation expense before taxes              2             83            3             223

Effect on net loss $ 2 $ 83 $ 3 $ 223

The decreases in employee stock-based compensation expense for the three and six months ended June 30, 2014 compared with the same periods in 2013 were primarily due to having fewer option shares vested in 2014.

Interest Income and Interest Expense



                                            Three Months Ended                       Six Months Ended
                                                 June 30,                %               June 30,               %
                                            2014            2013      Change        2014          2013        Change
                                                              (In thousands, except percentages)

Interest and other income, net $ 59 $ 1 5800 % $ 59 $ 10 490 %

The increase in interest and other income, net of approximately $58,000 for the three months ended June 30, 2014 compared to the same period in 2013 was due primarily to the decrease in fair value of the PIPE warrants. The increase in interest and other income, net of approximately $49,000 for the six months ended June 30, 2014 compared to the same period in 2013 was due primarily to the decrease in fair value of the PIPE warrants, partially offset by a gain from the sale of office equipment recorded during the six months ended June 30, 2013.

Liquidity and Capital Resources



                                            June 30,          December 31,
                                              2014                2013
                                            (In millions, except ratios)
          Cash and cash equivalents       $        2.0       $          2.2
          Working capital                 $        1.2       $          1.7
          Current ratio                        2.2 : 1              2.7 : 1

                                                  Six Months Ended
                                                      June 30,
                                              2014                2013
                                                    (In millions)
          Cash (used in) / provided by:
          Operating activities            $       (2.5 )     $         (3.9 )
          Investing activities            $         -        $         (1.3 )
          Financing activities            $        2.3       $          3.6

Sources and Uses of Cash. Due to historically significant research and development expenditures and the lack of any approved products to generate revenue, we have not been profitable and have generated operating losses since we incorporated in 1988. As such, we have funded our research and development operations through the sale of equity securities, non-equity payments from corporate partners, interest earned on investments, government grants and equipment lease and loan financings. At June 30, 2014, we had available cash and cash equivalents of $2.0 million. Our cash and investment balances are held in a variety of interest-bearing instruments including money market accounts. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of concentration and degrees of risk.


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Cash Flows from Operating Activities. Cash used in operations for the six months ended June 30, 2014 was $2.5 million compared with $3.9 million for the same period in 2013. Net loss of $2.7 million in the six months ended June 30, 2014 included non-cash charges of $3,000 for stock-based compensation and a $59,000 decrease in fair value of the PIPE warrants. Cash used in operations was impacted by an $182,000 reduction in prepaid expenses due to decreases in prepaid insurance and prepaid rent balances. Operating cash outflows for the same period in 2013 resulted primarily from a net loss of $3.3 million which included non-cash charges of $223,000 for stock-based compensation. Cash used in 2013 was impacted by a $622,000 net reduction in accrued facility exit costs primarily due to our lease termination agreements for our Porter Drive facility which is detailed in Note 7 of the Notes to Condensed Financial Statements. Cash used in operations in 2013 also included a $313,000 reduction in accrued liabilities primarily due to payments related to our annual audit and franchise tax.

Cash Flows from Investing Activities. There were no investing activities for the six months ended June 30, 2014 compared with $1.3 million cash used for the same period in 2013. Cash used in investing activities in 2013 was primarily from $2.3 million in the purchase of available-for-sale investments and was partially offset by $1.0 million in investment maturities. We had no capital expenditures for the six months ended June 30, 2014 or 2013.

Cash Flows from Financing Activities. Cash provided by financing activities for the six months ended June 30, 2014 was $2.3 million compared with $3.6 million cash provided for the same period in 2013. Cash provided by financing activities for the six months ended June 30, 2014 was from the sale of our Series B redeemable convertible preferred stock and warrants in the PIPE financing. Cash provided by financing activities for the same period in 2013 was from sales of our common stock under the Sales Agreement with MLV, or the Sales Agreement, of about $3.6 million in net proceeds.

Working Capital. Working capital decreased to $1.2 million at June 30, 2014 from $1.7 million at December 31, 2013. The decrease in working capital was primarily due to our use of cash for operating expenses.

Future Contractual Obligations. We currently have no future rental payment obligations under non-cancelable operating leases. Our master lease and sublease of our facility located at 3165 Porter Drive in Palo Alto, California were terminated on February 28, 2013 and we entered into a termination agreement with ARE on February 19, 2013 to voluntarily surrender our premises. As a result of the termination agreement, we were relieved of further obligations under the master lease and further rights to rental income under the sublease and paid a termination fee of approximately $0.7 million. In addition to the termination fee, if we receive $15 million or more in additional financing in the aggregate, an additional termination fee of $591,000 will be due to ARE, but will otherwise be forgiven.

On February 27, 2013, we entered into an arrangement to sublease a facility at 2100 Geng Road, Suite 102, Palo Alto, California in which to relocate our principal executive offices as the sublease of our former facility at 700 Hansen Way, Palo Alto, California expired on March 31, 2013. Upon execution of the agreement, we paid the sublessor the first month's rent with second month's rent due on March 28, 2013, and deposited into an escrow account approximately . . .

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