UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

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

For the Fiscal Year Ended December 31, 2013

OR

 

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

For the Transition period from                     to                     .

Commission file number: 0-31265

TELIK, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   93-0987903
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

2100 Geng Road, Suite 102, Palo Alto, CA 94303

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (650) 845-7700

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share   Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES   ¨    NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     YES  ¨    NO  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not be contained to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $6,138,540 as of June 30, 2013, based upon the closing sale price on the Nasdaq Capital Market reported on June 28, 2013. The calculation excludes approximately 12,964 shares held by directors, officers and stockholders whose ownership exceeded five percent of the Registrant’s outstanding Common Stock as of June 30, 2013. Exclusion of these shares should not be construed to indicate that such person controls, is controlled by or is under common control with the Registrant. The determination of affiliate status for the purposes of this calculation is not necessarily a conclusive determination for other purposes.

There were 4,583,096 shares of Registrant’s Common Stock issued and outstanding as of February 28, 2014.


TELIK, INC.

2013 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

          Page  

PART I

     

    Item 1.

   Business      4   

    Item 1A.

   Risk Factors      14   

    Item 1B.

   Unresolved Staff Comments      25   

    Item 2.

   Properties      25   

    Item 3.

   Legal Proceedings      25   

    Item 4.

   Mine Safety Disclosures      25   

PART II

     

    Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     26   

    Item 6.

   Selected Financial Data      28   

    Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

    Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      39   

    Item 8.

   Financial Statements and Supplementary Data      39   

    Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      39   

    Item 9A.

   Controls and Procedures      40   

    Item 9B.

   Other Information      41   

PART III

     

    Item 10.

   Directors, Executive Officers and Corporate Governance      42   

    Item 11.

   Executive Compensation      45   

    Item 12.

   Security Ownership of Certain Beneficial Owners and Management      49   

    Item 13.

   Certain Relationships and Related Transactions, and Director Independence      50   

    Item 14.

   Principal Accounting Fees and Services      50   

PART IV

     

    Item 15.

   Exhibits and Financial Statement Schedules      51   
SIGNATURES      54   
FINANCIAL STATEMENTS   
   Reports of Independent Registered Public Accounting Firms      55   
   Balance Sheets      57   
   Statements of Operations and Comprehensive Loss      58   
   Statements of Stockholders’ Equity      59   
   Statements of Cash Flows      60   
   Notes to Financial Statements      61   

 

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Disclosure Regarding Forward-Looking Statements

This Annual Report on Form 10-K, including the documents that we incorporate by reference, 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 Annual Report on Form 10-K 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: the implications of interim or final results of our Phase 2 clinical and Phase 3 registration trials, the progress and timing of our research programs, including clinical testing, our anticipated timing for filing additional Investigational New Drug, or IND, applications with the United States Food and Drug Administration for the initiation or completion of Phase 1, Phase 2 or Phase 3 testing for any of our product candidates, 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, which is discussed below), 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 to enter into additional collaborations, our future operating expenses, our future losses, our future expenditures for research and development, our cash resources and ability to fund current and future operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report. 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 the section of Item 1A entitled “Risk Factors,” and elsewhere in this Annual Report. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

TELIK, the Telik logo, TRAP, TELCYTA and TELINTRA are trademarks or registered trademarks of Telik, Inc. All other brand names or trademarks appearing in this Annual Report are the property of their respective holders.

 

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PART I

 

Item 1. Business.

Overview

Telik, Inc. was incorporated in Delaware in 1988 and is a clinical-stage drug development company focused on discovering and developing small molecule drugs to treat cancer. We discover our product candidates using our proprietary drug discovery technology, Target-Related Affinity Profiling, or TRAP, which we believe enables the rapid and efficient discovery of small molecule product candidates. Our business strategy is to establish partnerships with a pharmaceutical or biotechnology company to assist in further development and commercialization of TELINTRA and other pipeline.

Clinical Product Development

TELINTRA, our lead drug product candidate in clinical development, is a small molecule glutathione analog inhibitor of the enzyme glutathione S-transferase P1-1, or GST P1-1. We are developing TELINTRA for the treatment of blood disorders that are characterized by defects in blood formation with associated low blood cell levels, such as anemia, neutropenia or thrombocytopenia. We completed an 86 patient Phase 2 clinical trial of TELINTRA tablets, for the treatment of patients with myelodysplastic syndrome, or MDS, a hematologic cancer characterized by ineffective blood cell production, with anemia requiring large numbers of transfusions to support the patient. We presented the results at the annual meeting of the American Society of Hematology, or ASH, in December 2010. In addition, we completed a Phase 1 dose-ranging study of TELINTRA tablets in combination with Revlimid in patients with MDS and presented the results at the annual meeting of ASH in December 2011.

In 2012, we applied for orphan drug eligibility for TELINTRA for the treatment of MDS and were granted that designation by the US Food and Drug Administration, or FDA, in January 2013. We also completed an End of Phase 2 meeting with the FDA in January 2013 and in accordance with the FDA’s guidance, we have completed the design of 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. In order to focus our resources on the TELINTRA MDS registration program, we stopped further enrollment in all our Phase 2 exploratory trials and terminated these studies.

TELCYTA, our second product candidate, is a small molecule cancer drug product candidate designed to be activated in cancer cells. TELCYTA binds to GST P1-1, an enzyme that is elevated in many human cancers, such as ovarian, non-small cell lung, colorectal, and breast. GST P1-1 levels are often further elevated following treatment with many standard chemotherapy drugs and this elevation is associated with the development of resistance to these drugs. In order to focus our resources on TELINTRA development, we terminated the development of TELCYTA and the Investigational New Drug, or IND, was withdrawn in 2012.

Preclinical Drug Product Development

We have a small molecule compound, TLK60404, in preclinical development which inhibits both Aurora kinase and VEGFR kinase. Aurora kinase is a signaling enzyme whose function is required for cancer cell division, while vascular endothelial growth factor, or VEGF, plays a key role in tumor blood vessel formation, ensuring an adequate supply of nutrients to support tumor growth. The lead compounds of our first dual inhibitor program conducted in 2008 demonstrated anticancer activity in preclinical models of human colon cancer and human leukemia. We have conducted some preclinical safety studies. Since we are currently focused on TELINTRA development, no additional expenditure on this compound is expected.

We have also discovered TLK60357, a small molecule inhibitor of cell division. TLK60357 inhibits the formation of microtubules that are necessary for cancer cell growth leading to persistent cancer cell block and

 

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subsequent cell death at the G2/M phase of the cell cycle. This compound demonstrates potent broad-spectrum anticancer activity against a number of human cancer cells. This compound also displays oral efficacy in multiple, standard preclinical models of cancer. Since we are currently focused on TELINTRA development, no additional expenditure on this compound is expected.

In addition, we have identified TLK60596, a small-molecule dual inhibitor of VEGFR1 and VEGFR2 kinase. VEGFR1/2 kinases are known to mediate the formation of new blood vessels in human cancers allowing them to grow. In standard animal models of human colon cancer, oral administration of TLK60596 significantly reduced tumor growth. Since we are currently focused on TELINTRA development, no additional expenditure on this compound is expected.

Going concern

We believe our existing capital resources are only sufficient to support our operations through approximately May 2014. The timing remains uncertain, however, and may change as a result of efforts to further conserve resources and/or reducing expenses. In order to continue as a going concern, we will require substantial additional financing to fund our current and future operations and continue our clinical product development programs, and our ability to continue as a viable entity will be dependent on our ability to obtain this funding in a timely manner. We have been and are currently seeking collaborative arrangements with corporate partners to fund the development and commercialization of TELINTRA. However, we cannot provide any assurance that we will be successful in closing a collaborative arrangement in a timely manner and it is unlikely we will be able to raise sufficient funds to continue our existing operations beyond May 2014.

We have retained a financial advisory firm to explore and recommend strategic alternatives for us going forward. Those alternatives could include partnerships involving one or more of our product candidates, merger with or acquisition by another company, further restructuring of the company, the sale of company assets, in whole or in part, ceasing operations, or some other arrangement through which the value of our assets to stockholders could be optimized. In order to conserve resources to allow for time to pursue the above strategic alternatives, in 2013, we:

 

   

terminated the master lease agreement on a facility, which consists of approximately 92,000 square feet of research and office space, located at 3165 Porter Drive in Palo Alto, California and paid a termination fee of $0.7 million in connection therewith. If we receive $15 million or more in additional financing, an additional termination fee of $0.6 million will be due, but otherwise forgiven;

 

   

relocated our corporate offices from 700 Hansen Way, an 8,620 square feet office space, to 2100 Geng Road, a 3,075 square feet office space, resulting in a reduction of approximately 66% in monthly rent expenses;

 

   

stopped further enrollment of and ended all ongoing Phase 2 clinical trials of TELINTRA and contracts related to those activities; and

 

   

reduced our staff by approximately 29% from 17 persons to 12 by eliminating most of our research and development, manufacturing, clinical and regulatory activities and personnel. We expect to reduce headcount further during the next few months as additional activities are phased out or outsourced.

We cannot assure you that any actions that we take will raise or generate sufficient capital to fully address the significant uncertainties of our financial position. Moreover, we may not successfully identify or implement any of these alternatives, and, even if we determine to pursue one or more of these alternatives, we may be unable to do so on a timely basis or on acceptable financial terms. As a result, we may be unable to realize value from our assets and discharge our liabilities in the normal course of business. All of these factors raise substantial doubt about our ability to continue as a going concern.

 

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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.

We are striving to evidence compliance with the stockholders’ equity requirement; however, there can be no assurance that we will be able to do so prior to the date specified by the Panel. If we are unable to maintain our listing on the Nasdaq Capital Market, the liquidity of our common stock would be seriously limited.

Clinical Product Development Programs

Cancer is the second most common cause of death in the United States according to the American Cancer Society’s 2013 Cancer Facts and Figures. The five-year survival rates for patients with cancers that have spread from their original sites, although improved in recent years, are still poor. These poor survival rates reflect the limitations of current treatments and the development of resistance to available treatments. In addition, current treatments are often associated with severe toxic side effects.

TELINTRA

TELINTRA is our lead small molecule product candidate in clinical development for the treatment of blood disorders including cancer. It has a novel mechanism of action and acts by inhibiting GST P1-1, an enzyme that is involved in the control of cellular growth and differentiation. Inhibition of GST P1-1 results in the activation of the signaling molecule Jun kinase, a key regulator of the function of blood precursor cells. Preclinical tests show that TELINTRA is capable of causing the death or apoptosis of leukemic or malignant blood cells, while stimulating the growth and development of normal blood precursor cells. TELINTRA, therefore, may lead to a treatment for diseases that are characterized by the presence of abnormal blood cells and or low levels of normal blood cells. The combination of abnormal cells and low normal blood cell levels is found in a number of hematologic diseases, including MDS.

In addition, decreased normal blood cell levels, especially of white cells, occur as a common side effect of cancer chemotherapy and render the already weakened cancer patient susceptible to life-threatening infections. Treatment is intended to accelerate the recovery of the white blood cells levels and decrease the risk for developing an infection. TELINTRA accelerated the recovery of white blood cells (neutrophils) in several preclinical models of chemotherapy induced neutropenia. Since currently approved treatments for this complication are given by injection, the oral formulation of TELINTRA, if effective, may prove to be a convenient alternative.

TELINTRA has been studied in MDS using two formulations. A liposomal formulation was developed for intravenous administration of TELINTRA and was used in Phase 1 and Phase 2 studies in MDS patients. The results from the Phase 2 intravenous liposomal TELINTRA clinical trials demonstrated that TELINTRA treatment was associated with improvement in all three types of blood cell levels in patients with all types of MDS, including those in intermediate and high-risk groups. An oral dosage formulation (tablet) was subsequently developed and results from a Phase 1 study with TELINTRA tablets showed clinical activity and

 

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the formulation to be well tolerated. The tablet formulation of TELINTRA may offer advantages, including ease of manufacturing and oral administration and allow us to offer a product that is an alternative to the currently marketed parenterally administered drugs.

The activity and safety profile of tablet formulation allowed us to complete a Phase 2 trial of TELINTRA tablets in MDS. The results of this study were reported at the 52nd annual meeting of ASH in December 2010. The primary objective of the Phase 2 TELINTRA tablet study was to determine the efficacy of TELINTRA, defined by Hematologic Improvement, or HI, response rate according to the 2006 International Working Group criteria, or IWG 2006, as well as its safety. An additional goal of this study was to identify those patients whose MDS disease characteristics may allow us to prospectively target patients most likely to respond to TELINTRA treatment. A multivariate logistic regression analysis was conducted to identify significant MDS disease prognostic factors associated with erythroid improvement response rates, including prior MDS treatment, age, gender, the international prognostic scoring system, or IPSS, risk, Eastern Cooperative Group performance status, years from MDS diagnosis, MDS World Health Organization subtypes, anemia only versus anemia plus other cytopenias, dose schedule and starting dose. Results from this study show that:

 

   

TELINTRA is the first GSTP1-1 enzyme inhibitor shown to cause clinically significant reductions in red blood cell transfusions, including transfusion independence in low to intermediate-1 risk MDS patients, as well as improvement in platelet count and white blood cell levels in certain patients. The multilineage responses and safety profile observed provides a unique clinical activity profile with attractive tolerability and safety.

 

   

TELINTRA, administered orally twice daily, appeared to be convenient and flexible for chronic treatment administration.

 

   

The hematologic improvement rates were consistent with the Phase 1 results with TELINTRA and the duration of response was enhanced using the extended dose schedules.

 

   

Prior treatment with certain agents may influence the response to subsequent TELINTRA treatment. Revlimid is currently the only drug approved for treatment of low to intermediate-1 risk MDS red blood cell transfusion dependent patients with the 5q deletion cytogenetic karyotype. TELINTRA has shown clinically significant activity in Revlimid naïve or prior Revlimid resistant patients.

 

   

Prior history of Vidaza or Dacagen treatment appears to be an important predictor of decreased TELINTRA efficacy and tolerability. These findings may assist ongoing pharmacogenomic studies to characterize the genomic profile of responders and develop a test to identify those patients that are more likely to respond to TELINTRA treatment.

We completed a Phase 1 dose-ranging study of TELINTRA tablets in combination with Revlimid in patients with MDS to assess the potential for development of combination chemotherapy with TELINTRA and Revlimid for the treatment of MDS in the fourth quarter of 2011 and results were presented at the 53rd annual meeting of ASH in December 2011. The rationale for this study was based upon the novel mechanism of action of TELITRA, non-overlapping toxicity with Revlimid, and the need for improved treatment options. The primary objective of the study was to establish the safety of the combination and the optimal dosing for TELINTRA in combination with the standard dose of Revlimid. The secondary objectives were to assess the efficacy as measured by rates of hematologic improvement in red blood cell, white blood cell and platelet levels, and decreases in blood transfusions. In this study, the combination of TELINTRA and Revlimid was generally well tolerated with no unexpected new toxicities and the observed toxicities were those expected from either agent alone. It also provided a unique profile of activity with platelet transfusion independence and trilineage and bilineage responses, which was also seen with single-agent TELINTRA. Findings of the study support the further development of the combination in MDS as well as other hematologic malignancies where Revlimid is a standard of care.

We also reported the results of gene expression analyses performed on clinical samples obtained from MDS patients on our Phase 2 study at the 53rd annual meeting of ASH. The goal of these analyses is to identify patients

 

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more likely to respond to TELINTRA therapy. Pre-therapy bone marrow mononuclear cells of MDS patients treated with TELINTRA who demonstrated hematologic improvement were analyzed for gene expression by whole genome array. The top 100 differentially expressed genes of responders and non-responders were identified and revealed a number of genes and unidentified transcripts that may play a role in the MDS patient response to TELINTRA treatment. Pathway analysis of the expression data confirmed that a c-Jun N-terminal kinase, or JNK, gene set was consistently under-expressed in the pre-therapy bone marrow mononuclear cells of responders and over-expressed in non-responders. Importantly, this result was consistent with the proposed TELINTRA mechanism of action: patients whose pre-therapy marrow showed under-expression of the JNK gene set were those who benefited from TELINTRA; while those patients who over-expressed these genes were unlikely to respond to TELINTRA. In addition, it may be possible to use gene expression signatures to enable selection of MDS patients that are most likely to benefit from TELINTRA.

In 2011, we initiated a Phase 2 clinical trial of TELINTRA in patients with Revlimid refractory or resistant del 5q MDS and a Phase 2b clinical trial of TELINTRA in patients with non-deletion 5q MDS, who have not been treated with HMA. As a result of our meeting with the FDA in January 2013, we have decided to stop further enrollment in these two trials in order to focus our resources on the Phase 3 registration program.

In addition to MDS, we are studying the use of TELINTRA for the treatment of SCN, a blood disorder typified by very low neutrophil or white blood cell levels. White blood cells are important in defending the body against infections, and therefore, a patient with severely low white blood cell levels is more susceptible to life-threatening infections. A publication on November 2, 2011, in the Journal of Hematology & Oncology entitled “Oral ezatiostat HCl (Telintra®, TLK199) and Idiopathic Chronic Neutropenia (ICN): A case report of complete response of a patient with G-CSF resistant severe chronic idiopathic neutropenia following treatment with Telintra highlights an important observation that TELINTRA produced a striking and sustained hematologic response in white blood cell levels in an ICN patient who had an inadequate response to the standard of care, granulocyte colony stimulating factors, or G-CSF. This case report describes a patient with severe ICN who experienced frequent episodes of sepsis requiring hospitalizations and prolonged courses of antibiotics for the preceding four years. She was treated with G-CSF and had delayed, variable, and transient responses. After receiving TELINTRA therapy, her white blood cell levels stabilized, temperature normalized, and chronic infections resolved for over eight months. These results may suggest a potential role for TELINTRA in the treatment of patients who are not responsive to G-CSF injections. TELINTRA, a GST P1-1 inhibitor, may achieve this effect by activating JNK, promoting the growth and maturation of blood progenitor stem cells.

In December 2012, an abstract entitled “Oral Ezatiostat HCl (Telintra), a Glutathione Analog Prodrug GSTP1-1 Inhibitor, for Treatment of Patients with Myeloid Growth Factor-Resistant Idiopathic Chronic Neutropenia (ICN),” was published in the proceedings of ASH national meeting. This abstract reports the preliminary results of a clinical trial with TELINTRA in patients with ICN, a rare group of blood disorders characterized by low circulating neutrophils, recurrent fevers, mucosal inflammation and serious systemic infections. The risk and severity of these complications is related to abnormally low levels of white blood cells. Most patients initially respond to treatment with G-CSF; however, some patients fail to respond or become resistant to G-CSF treatments. Further, G-CSF therapy is often associated with bone and muscle pain, low platelet counts and enlargement of the spleen. Patients may need to be on G-CSF for the rest of their lives, and these side effects can interfere with therapy.

Four patients with longstanding, severe ICN and inadequate absolute neutrophil count, or ANC, response to G-CSF were enrolled in this phase 2 trial. These patients all had a history of frequent hospitalization for sepsis, prolonged courses of antibiotics and poor response to myeloid growth factors, including G-CSF. TELINTRA treatment of these ICN patients with grade 4 neutropenia who were not responsive to G-CSF resulted in a durable increase in their white-blood-cell levels, leading to clinically significant reductions in serious infections. Extended treatment with TELINTRA has been well tolerated in these patients and may be appropriate for longer-term therapy. TELINTRA is the first targeted GSTP1-1 inhibitor that has been shown to have a positive effect on white blood cell levels in ICN and may provide molecular insight into the pathophysiology of ICN. These results

 

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suggest that further study is warranted of TELINTRA’s potential role as an oral therapy alternative or adjunct to G-CSF in the treatment of ICN in patients who are not responsive to G-CSF.

TELCYTA

TELCYTA is a small molecule drug product candidate we are developing for the treatment of cancer. TELCYTA binds to GST, a protein known to play an important role in the development of resistance to commonly used chemotherapeutic drugs. GST P1-1 is a type of GST that is elevated in many cancers and is often further elevated following treatment with standard chemotherapeutic drugs. When TELCYTA binds to GST P1-1, it releases a fragment with a proven mechanism of killing cancer cells as well as other reactive agents. In contrast to the usual situation in which GST P1-1 is involved in the destruction of chemotherapeutic drugs, GST P1-1 activates TELCYTA when TELCYTA reaches its cellular target. In this way, TELCYTA kills cancer cells by inducing cell death through a process called apoptosis. TELCYTA has been evaluated in multiple Phase 1, 2 and 3 clinical trials, including trials using TELCYTA as monotherapy and in combination regimens in ovarian, non-small cell lung, breast and colorectal cancer. However, in order to focus our resources on TELINTRA development, we terminated the development of TELCYTA and the IND was withdrawn in 2012.

Preclinical Drug Product Development

TLK60404—Aurora Kinase/VEGFR Inhibitors

We have a small molecule compound, TLK60404, in preclinical development which inhibits both Aurora kinase and VEGFR kinase. Aurora kinase is a signaling enzyme whose function is required for cancer cell division, while VEGF plays a key role in tumor blood vessel formation, ensuring an adequate supply of nutrients to support tumor growth. The lead compounds of our first dual inhibitor program met a development milestone in August 2008 by demonstrating anticancer activity in preclinical models of human colon cancer and human leukemia. These lead compounds prevented tumor growth in preclinical models of human colon cancer and human leukemia by inhibiting Aurora kinase and VEGFR kinase. Our data support the concept that dual inhibition of Aurora kinase and VEGFR kinase represents a promising approach for anticancer therapy. A development drug product candidate, TLK60404, has been selected. We have conducted some preclinical safety studies. Since we are currently focused on TELINTRA development, no additional expenditure on this compound is expected.

TLK60357—Antimitotic Agent

Using our TRAP technology, we have discovered TLK60357, a novel, potent small molecule inhibitor of cell division. TLK60357 inhibits the formation of microtubules that are necessary for cancer cell growth leading to persistent G2/M cancer cell cycle block and subsequent cell death. This compound demonstrates potent broad-spectrum anticancer activity against a number of human cancer cells. This compound also displays oral efficacy in multiple, standard preclinical models of cancer. Since we are currently focused on TELINTRA development, no additional expenditure on this compound is expected.

TLK60596 – VEGFR Inhibitor

TLK60596, a potent VGFR kinase inhibitor, blocks the formation of new blood vessels in tumors. Oral administration of TLK60596 to animal models of human colon cancer significantly reduced tumor growth. Since we are currently focused on TELINTRA development, no additional expenditure on this compound is expected.

Research Discovery Programs

In addition to generating our current clinical product candidate portfolio, TRAP has allowed us to build our research pipeline with product candidates against targets in cancer. We have chosen to pursue those targets that

 

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have engendered a high level of interest in the drug discovery community, address important unmet clinical needs and whose modulation are expected to have a beneficial effect in treating a given disease. We are continually evaluating and prioritizing our early stage programs.

TRAP Technology

Our TRAP drug discovery technology is designed to rapidly and efficiently identify small molecule compounds that act on disease-related protein targets. TRAP technology offers solutions to the two major challenges facing drug discovery: the explosive growth in the number of new protein targets generated by the advances in genomics, and the intrinsic limitations of the Ultra High Throughput Screening, or UHTS, approach. TRAP offers several competitive advantages over UHTS, because it is able to accommodate thousands, rather than hundreds, of targets; is cost-effective to screen unproven targets for the purpose of validation; and allows the use of complex biologically relevant assays rather highly simplified assays.

We have computationally enhanced TRAP by calculating affinity fingerprints, which greatly expands the number of compounds that can be surveyed. Our small-molecule database now has over 3.5 million computed affinity fingerprints. This approach has eliminated our need to maintain a large chemical inventory, resulting in a significant cost savings. Also, since fingerprints can be computed, TRAP can guide medicinal chemistry by evaluating potential compounds before they are made, thereby reducing the time and resources needed to develop a product candidate.

Collaborative Relationships

We are seeking to enter into collaborative arrangements with third parties for clinical trials, development, manufacturing, regulatory approvals or commercialization of some of our product candidates, particularly outside North America, or in disease areas requiring larger and longer clinical trials.

We have in the past established, and we continue to seek, joint discovery programs with other pharmaceutical, biotechnology and genomics companies. These collaborations would exploit our TRAP technology platform and have the potential to identify new product development and commercialization opportunities either independently or pursuant to expanded collaborations.

Patents and Proprietary Information

Patents and other proprietary rights are very important to our business. If we have enforceable patents of sufficient scope, it can be more difficult for our competitors to use our technology to create competitive products or to obtain patents that prevent us from using technology we create. As part of our business strategy, our policy is to actively file patent applications in the United States and internationally to cover new chemical compounds, pharmaceutical compositions, methods of preparation of the compounds and compositions and therapeutic uses of the compounds and compositions, methods related to our TRAP technology, and improvements in each of these. We also rely on trade secret information, technical know-how, innovation and agreements with third parties to continuously expand and protect our competitive position.

We can generally expect to obtain patent term extensions of up to five years for patents covering our product candidates in many countries when and if marketing approvals are obtained. In foreign countries, these extensions are available only if approval is obtained before the patent expires, but in the United States, extensions are available even if approval is obtained after the patent would expire normally through a system of interim extensions until approval.

Orphan drug designation for TELINTRA for the treatment of MDS was granted by the FDA in January 2013. Orphan designation grants potential US market exclusivity to a drug for the treatment of a specified condition for a period of seven years following FDA marketing approval. We are actively pursuing multiple new

 

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life cycle patent applications for TELINTRA, including applications related to combination therapies, polymorphs, formulations, manufacturing processes and the genomic profiles of responders. We also have been granted US and foreign patents for novel analogs of TELINTRA, expiring in 2026, and a US patent on the tablet formulation of TELINTRA, expiring in 2031. We have US and foreign patents pending on crystalline forms and polymorph form of TELINTRA; amorphous ansolvate form of TELINTRA; manufacturing process for TELINTRA crystalline form; dosing schedule and treatment methods for MDS with TELINTRA; the treatment of multiple myeloma with TELINTRA; and excipient compatibility with TELINTRA. One patent on treatment methods for MDS with TELINTRA was granted at the European Patent Office. Intention to grant has been received from the European Patent Office for a patent on dosing schedule and a patent on treatment methods for MDS with TELINTRA. If granted these patents would expire in 2031 or 2032. In addition to patent protection, we would generally be entitled to data exclusivities for our product candidates in many countries for several years after marketing approval (for example, 5 years in the United States and up to 10 years in the European Union) when and if marketing approvals are obtained.

We have US and foreign patents granted or pending on our pipeline drug development candidates TLK60404, TLK60357 and TLK60596. These patents will expire in 2029, 2030 and 2032 respectively.

The primary patents that cover our TRAP technology will expire in August, 2015. However computational TRAP that was developed and refined in the past decade remains protected by extensive internal technical knowhow and trade secrets. We also rely on trade secret information, technical know-how, innovation and agreements with third parties to continuously expand and protect our proprietary position. We do not disclose our trade secrets (including significant aspects of our TRAP technology) outside Telik except where disclosure is essential to our business, and we require those individuals, companies and institutions doing business with us, including TRAP collaborators, to execute agreements to protect our trade secrets. We require our employees and consultants to execute non-disclosure and assignment of invention agreements on commencement of their employment or engagement.

Competition

Competition in the pharmaceutical and biotechnology industries is intense. The product candidates that we and our collaborative partners are developing will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. Many pharmaceutical or biotechnology companies have products on the market and are actively engaged in the research and development of products that are competitive with our potential product candidates. Many of these companies and institutions, either alone or together with their collaborative partners, have substantially greater financial, manufacturing, sales, distribution and technical resources and more experience in research and development, clinical trials and regulatory matters, than we do. In addition, our competitors may succeed in developing technologies and drugs that are more effective, better tolerated or less costly than any which are being developed by us and our collaborative partners or which would render our technology or potential product candidates obsolete or noncompetitive.

Regulatory Considerations

The manufacturing and marketing of our product candidates and our on-going research and development activities are subject to extensive regulation by numerous governmental authorities in the United States and other countries. In the United States, pharmaceutical products are subject to rigorous review by the FDA under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations. Non-compliance with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, refusal of the government to approve marketing applications or allow us to enter into supply contracts and criminal prosecution. The FDA also has the authority to revoke previously granted marketing authorizations.

 

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Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish a product candidate’s safety and efficacy. The approval process may take many years, requires the expenditure of substantial resources, may involve post-marketing surveillance and may involve on-going requirements for post-marketing studies. The FDA may also require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of the products. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce the period during which we will have exclusive rights to exploit those products or technologies.

The cost of preparing and submitting a New Drug Application, or NDA, is substantial. Under federal law, the submission of most NDAs is additionally subject to a substantial application user fee and the manufacturer and/or sponsor under an approved new drug application are also subject to annual product and establishment user fees.

Preclinical studies involve laboratory evaluation and animal studies to assess the initial efficacy and safety of a product candidate. The FDA, under its Good Laboratory Practices regulations, regulates preclinical studies. Violations of these regulations can, in some cases, lead to invalidation of the studies, requiring these studies to be replicated. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must be approved by the FDA before we can commence clinical trials in humans. Unless the FDA objects to an IND, the IND would become effective 30 days following its receipt by the FDA.

Clinical trials involve the administration of the investigational product candidate to humans under the supervision of a qualified principal investigator. Clinical trials in the United States must be conducted in accordance with Good Clinical Practice, or GCP, under protocols submitted to the FDA as part of the IND. In addition, each clinical trial must be approved and conducted under the auspices of an Investigational Review Board, or IRB, and with patient informed consent. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possibility of liability of the institution conducting the trial.

The FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

Clinical trials in the United States are conducted in three sequential phases though the phases may overlap. Phase 1 clinical trials may be performed in healthy human subjects or, depending on the disease, in patients. The goal of Phase 1 clinical trials is to establish initial data about the safety and tolerance of the product candidate in humans. In Phase 2 clinical trials, in addition to safety, the efficacy of the product candidate is evaluated in a limited number of patients with the target disease. Phase 3 clinical trials typically involve additional testing for safety and clinical efficacy in expanded, large-scale, multicenter studies of patients with the target disease. We have engaged contract research organizations, or CROs, to facilitate the administration of some of our clinical trials.

We and all of our contract manufacturers are required to comply with the applicable FDA current Good Manufacturing Practice, or cGMP, regulations applicable to the manufacture of the clinical and commercial supplies of our product candidates. cGMP regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. These facilities must be approved before we can use them in the commercial manufacture of our product candidates.

 

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Outside the United States, our ability to market a product is contingent upon receiving marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At present, foreign marketing authorizations are generally applied for and obtained at a national level, although within the European Union registration procedures are available to companies wishing to market a product in more than one European Union member state. If the foreign regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted for the applicable country.

Manufacturing

Isochem North America LLC, or Isochem, has in the past manufactured and supplied a limited number of batches of the active ingredient to be used in the production of TELINTRA for use in clinical trials. As such, we have qualified Isochem as a potential source of supply for clinical quantities of this ingredient. In addition, Patheon Inc., or Patheon, has in the past performed formulation development and analytical services, and produced for us limited batches of clinical trial material, relating to the tablet formation of TELINTRA. As such, we have qualified Patheon as a potential manufacturer of TELINTRA tablets. However, we currently do not have in effect any manufacturing or supply agreements with either Isochem or Patheon. Although we have not qualified any other sources for the active ingredient in TELINTRA or the manufacture of TELINTRA tablets, we have evaluated, and may consider, potential alternative sources for this material in the future.

Should we obtain sufficient funding to continue our development activities, we intend to continue to use third-party contract manufacturers or corporate collaborators for the production of material for use in preclinical studies, clinical trials, manufacture of future products and commercialization. The manufacture of our product candidates for preclinical studies and clinical trials and commercial purposes is subject to regulations promulgated by the FDA and to other applicable domestic and foreign regulations.

Research and Development

Our goal is to develop small molecule drugs for major disease areas and this goal has been supported by our substantial research and development investments. We spent approximately $2.0 million in 2013, $3.5 million in 2012 and $5.6 million in 2011 on research and development. We conduct research internally and also through collaborations with third parties, including universities. In 2013, approximately 88% of our research and development was conducted internally and 12% was conducted through collaborations with third parties, including consultants.

Employees

As of February 15, 2014, our workforce consisted of one part-time and 11 full-time employees. Of these, three hold Ph.D. or M.D. degrees, or both, and two hold other advanced degrees. Of our total workforce, 6 are engaged in research and development and 6 are engaged in business development, finance and administration. None of our employees are represented by a collective bargaining agreement, nor have we experienced any significant work stoppages. We believe that our relations with our employees are good.

 

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Item 1A. Risk Factors.

Our business faces significant risks, some of which are set forth below to enable readers to assess, and be appropriately apprised of, many of the risks and uncertainties applicable to the forward-looking statements made in this Annual Report. You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results and financial condition. If any of the events or circumstances described in the following risks actually occurs, our business may suffer, the trading price of our common stock could decline and our financial condition or results of operations could be harmed. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. These risks should be read in conjunction with the other information set forth in this Annual Report. There may be additional risks faced by our business, though we do believe that the risks set forth below reflect the more important ones.

We are unlikely to be able to raise sufficient funds to continue our existing operations as currently structured.

We believe our existing capital resources are only sufficient to support our operations through approximately May 2014. The timing remains uncertain, however, and may change as a result of efforts to further conserve resources and/or reducing expenses. We are unlikely to be able to raise sufficient funds to continue our existing operations beyond that time and as a result, we do not expect to resume the conduct of our current operations other than as a substantially restructured entity. At the present time, our strategy to benefit of our stockholders is to take steps to preserve and support the future value, if any, of TELINTRA, to seek funding for our pre-clinical small molecule compounds, to conserve our current cash to the extent reasonably practicable and to generate cash, including potentially through the sale of assets. To conserve cash, we have terminated and settled our lease obligations, relocated to a smaller facility, stopped further enrollment and ended all ongoing clinical trials and we expect to reduce headcount further during the next few months as additional activities are phased out or outsourced. To fund the development of our small molecule drugs program and preserve the value of our TELINTRA program, we may pursue strategic alternatives that result in the stockholders of Telik having significantly reduced or non-existent economic interests in the pre-clinical small molecule compounds or TELINTRA programs or other assets of Telik as stockholders or otherwise. We will continue to evaluate our alternatives in light of our cash position, including the merger with or acquisition by another company.

If we are unable to raise adequate funds in the near future, we will not be able to continue to fund our operations, research programs, preclinical testing and clinical trials to develop and manufacture our drug product candidates, and our auditors have indicated that our recurring losses and net capital deficiency raise substantial doubt about our ability to continue as a going concern.

The process of carrying out the development of our own unpartnered product candidates to later stages of development and developing other research programs to the stage that they may be partnered to a pharmaceutical or biotechnology company will require significant additional expenditures, including the expenses associated with preclinical testing, clinical trials and obtaining regulatory approval. Our independent registered public accounting firm has issued a report on our financial statements that includes an explanatory paragraph referring to our recurring losses from operations and expressing substantial doubt as to our ability to continue as a going concern without additional capital becoming available. While we raised $3.6 million in additional funding in 2013, we believe our existing cash and investment securities will only be sufficient to support our operations through approximately May 2014 and it is unlikely we will be able to raise sufficient funds to continue our existing operations beyond that time. We have retained a financial advisory firm to assist in fundraising efforts and to explore and recommend strategic alternatives, including alternatives for maximizing the value of our assets in the near-term. Those alternatives could include partnerships involving one or more of our product candidates, merger with or acquisition by another company, the further restructuring of our operations to conserve resources, the sale of company assets, in whole or in part, ceasing operations, or some other arrangement through which the value of our assets to stockholders could be optimized. In addition, the tight credit markets and concerns regarding the availability of credit, particularly in the United States, may also negatively impact our ability to raise additional capital to fund our business. If we fail to maintain the minimum

 

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$1.00 per share listing requirement or fail to timely satisfy the minimum $2,500,000 stockholders’ equity listing requirement, each as required by the Nasdaq Capital Market, our ability to raise additional capital in the public equity market, including through the Sales Agreement, will also be significantly impaired. We cannot assure you that any future actions that we may take will raise or generate sufficient capital to fully address the significant uncertainties of our financial position. Moreover, we may not successfully identify or implement any of the above alternatives, and, even if we determine to pursue one or more of these alternatives, we may be unable to do so on a timely basis or on acceptable financial terms. As a result, we may be unable to realize value from our assets and discharge our liabilities in the normal course of business. All of these factors raise substantial doubt about our ability to continue as a going concern.

Raising additional capital by issuing securities or through collaboration and licensing arrangements may cause dilution to existing stockholders or require us to relinquish rights to our technologies or product candidates.

In order to fund our current and future operations, including the initiation of a Phase 3 registration trial of TELINTRA, we need to raise additional funds through equity or debt financings, collaborative arrangements with corporate partners or other sources. On August 30, 2011, we entered into an At Market Issuance Sales Agreement, or the Sales Agreement with McNicoll, Lewis & Vlak LLC, or MLV, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price up to $7.0 million, from time to time, through the Sales Agreement. For the year ended December 31, 2013, we sold 1,893,896 shares of our common stock through MLV under the Sales Agreement and received approximately $3.6 million in net proceeds after deducting commissions and other related expenses. As of December 31, 2013, we have sold 2,782,887 shares of our common stock and received approximately $5.8 million in net proceeds since entering into the Sales Agreement leaving approximately $1.0 million in aggregate offering price of shares that can be sold under the Sales Agreement with MLV. Our ability to sell shares of our common stock pursuant to the Sales Agreement is subject to share volume limitations, market conditions and our continued listing on the Nasdaq Capital Market.

To the extent that we raise additional capital by issuing equity securities, our stockholders will experience dilution. To the extent that we raise additional capital through licensing arrangements or arrangements with collaborative partners, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves.

We have a history of net losses, which we expect to continue for the next several years should we have the ability to operate as a going concern. We will never be profitable unless we develop, and obtain regulatory approval and market acceptance of, our product candidates.

To date, we have not obtained regulatory approval for the commercial sale of any products, and we have not received any revenue from the commercial sale of products. Due to the significant research and development expenditures required to develop our TRAP technology and identify new product candidates, and the lack of any products to generate revenue, we have not been profitable and have incurred operating losses since we were incorporated in 1988. As of December 31, 2013, we had an accumulated deficit of $553.5 million. Should we have the ability to operate as a going concern, we expect to incur losses for the next several years as we continue our research and development activities and incur significant clinical testing and drug supply manufacturing costs. We do not anticipate that we will generate product revenue for at least several years. Our losses, among other things, have caused and will cause our stockholders’ equity and working capital to decrease. We expect that this trend will continue until we develop, and obtain regulatory approval and market acceptance of, our product candidates, if at all. We may never generate product revenue sufficient to become profitable.

 

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Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from the Nasdaq Capital Market and are unable to transfer our listing to another stock market.

On July 21, 2010, we received notice from Nasdaq that the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market under Nasdaq Marketplace Rule 5550(a)(2) and that we had 180 calendar days to regain compliance. On January 19, 2011, we received a notice from Nasdaq indicating that, while we had not regained compliance with the $1.00 per share requirement, Nasdaq had determined that Telik was eligible to receive an additional 180-day period to regain compliance. On February 10, 2011, we received a notice from Nasdaq indicating that for the preceding, ten consecutive business days, the closing bid price of our common stock had been $1.00 per share or greater and, as such, we had regained compliance with the $1.00 per share minimum bid price requirement. On April 21, 2011, we received notice from Nasdaq that the bid price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market and that we had 180 calendar days, or until October 18, 2011 to regain compliance. On October 20, 2011, we received notice from Nasdaq that we had been provided an additional 180-day period, or until April 16, 2012, to regain compliance with the minimum $1.00 per share requirement. On March 30, 2012, we effected a 1-for-30 reverse stock split. On April 17, 2012, we received notice from Nasdaq that we had regained compliance with the minimum bid price requirement. On November 14, 2013, we received notice from Nasdaq 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 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. We are striving to evidence compliance with the stockholders’ equity requirement; however, there can be no assurance that we will be able to do so prior to the date specified by the Panel.

There is no assurance we will be able to evidence timely compliance with the $2,500,000 stockholders’ equity requirement or maintain compliance with this and any other Nasdaq listing requirements. Delisting from the Nasdaq Capital Market could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. If our common stock is delisted by Nasdaq the price of our common stock may decline and our common stock may be eligible to trade on the OTC Bulletin Board, another over-the-counter quotation system, or on the pink sheets where an investor may find it more difficult to dispose of their Telik common stock or obtain accurate quotations as to the market value of our common stock. Further, if we are delisted, we would incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market.

If clinical trials of our product candidates are delayed or unsuccessful, or if we are unable to complete the preclinical development of our other preclinical product candidates, our business may suffer.

Preclinical testing and clinical trials are long, expensive and uncertain processes. It may take us or our collaborators several years to complete this testing, and failure can occur at any stage of the process. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim

 

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results of clinical trials do not necessarily predict final results. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier clinical trials. To obtain regulatory approvals, we must, among other requirements, complete carefully controlled and well-designed clinical trials demonstrating that a particular drug is safe and effective for the applicable disease. In order to complete such trials, we will need to raise significant additional funds.

We have completed multiple Phase 1 and 2 clinical trials of TELINTRA in MDS, a form of pre-leukemia, to evaluate safety, pharmacokinetics, pharmacodynamics and efficacy. In order to conserve cash, we stopped enrollment and ended our randomized Phase 2 clinical trial of TELINTRA in patients with SCN and two Phase 2 clinical trials to evaluate TELINTRA in patients with Revlimid refractory or resistant, deletion 5q MDS, and in patients with transfusion dependent, non-deletion 5q MDS, who have not been treated with prior hypomethylating agents. In accordance with the FDA guidance, we completed the design of a Phase 3 registration trial of TELINTRA in MDS, but the program is currently on hold due to lack of funds.

TELCYTA, our other product candidate, has been evaluated in multiple Phase 1, 2 and 3 clinical trials. Our Phase 3 trials did not achieve their primary endpoints and consequently the FDA required that we conduct additional studies of TELCYTA to complete clinical development. In May 2010, we initiated an investigator led study at a single site of TELCYTA in patients with refractory or relapsed mantle cell lymphoma, diffuse large B cell lymphoma, and multiple myeloma. However, in an effort to focus our resources on TELINTRA development, we terminated this study and the IND was withdrawn in 2012.

Our success now depends in even larger part on our ability to obtain funding for and continue the clinical development of TELINTRA, our lead drug product candidate. We do not presently have sufficient funding to continue the clinical development of TELINTRA, nor do we have sufficient funding to initiate a Phase 3 registration trial. If we do not obtain the sufficient capital that is required to conduct additional studies, if the FDA does not approve the studies or if the data on future clinical trials are not positive, we may not be able to continue clinical development on TELINTRA and our business will suffer.

We rely on third-party clinical investigators to conduct our clinical trials and, as a result, we may face additional delays outside our control. We have in the past engaged contract research organizations, or CROs, to facilitate the administration of our Phase 3 clinical trials. Dependence on a CRO subjects us to a number of risks. We may not be able to control the amount and timing of resources the CRO may devote to our clinical trials. Should the CRO fail to administer our Phase 3 clinical trials properly and on a timely basis, regulatory approval, development and commercialization of our product candidates will be delayed.

We do not know whether we will begin planned clinical trials on time or whether we will complete any of our on-going clinical trials on schedule, if at all. Clinical trials can be delayed for a variety of other reasons, including delays in clinical testing, obtaining regulatory approval to commence a study, delays in reaching agreement on acceptable clinical study agreement terms with prospective clinical sites, delays in obtaining institutional review board approval to conduct a study at a prospective clinical site and delays in recruiting subjects to participate in a study. Even if we are able to complete such clinical trials, we do not know whether any such trials will result in marketable products. Typically, there is a high rate of failure for product candidates in preclinical and clinical trials. We do not anticipate that any of our product candidates will reach the market for at least the next several years.

Delays in clinical testing can also materially impact our product candidates’ development costs. If we experience delays in clinical testing or approvals, our product candidates’ development costs will increase. For example, we may need to make additional payments to third-party investigators and organizations to retain their services or we may need to pay additional recruitment incentives. If the delays are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our ability to remain viable will be significantly impaired or delayed.

 

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If we do not find collaborators for our product candidates, we may have to reduce or delay our rate of product development and/or increase our expenditures.

Our strategy to develop, manufacture and commercialize our products includes entering into relationships with pharmaceutical companies to advance certain programs and reduce our expenditures with respect to such programs. Our product candidates will target highly competitive therapeutic markets in which we have limited experience and expertise. If we are unable to develop this expertise ourselves, we will need to enter into agreements with one or more biotechnology or pharmaceutical companies to provide us with the necessary resources and experience for the development and commercialization of products in these markets. In particular, we are seeking a partnership with a pharmaceutical or biotechnology company to further advance the development and commercialization of TELINTRA. There are a limited number of companies with the resources necessary to develop our future products commercially, and we may be unable to attract any of these firms. The current credit and financial market conditions could also impact our ability to find a collaborator for our development programs. A company that has entered into a collaboration agreement with one of our competitors may choose not to enter into a collaboration agreement with us. We may not be able to negotiate a collaboration agreement on acceptable terms or at all. If we are not able to establish collaborative arrangements, we may have to reduce or delay further development of some of our programs and/or increase our expenditures and undertake the development activities at our own expense. If we elect to increase our expenditures to fund our development programs, we will need to obtain additional capital, which may not be available on acceptable terms or at all.

In addition, there have been a significant number of recent business combinations among biotechnology and pharmaceutical companies that have reduced the number of potential future collaborators that would be willing to enter into a collaboration agreement with us. If business combinations involving potential collaborators continue to occur, our ability to find a collaborative partner could be diminished, which could result in the termination or delay in one or more of our product candidate development programs.

We will depend on collaborative arrangements to complete the development and commercialization of some of our product candidates. These collaborative arrangements may place the development of our product candidates outside of our control, may require us to relinquish important rights or may otherwise not be on terms favorable to us.

We may enter into collaborative arrangements with third parties for clinical trials, development, manufacturing, regulatory approvals or commercialization of some of our product candidates. Dependence on collaborative arrangements will subject us to a number of risks. We may not be able to control the amount and timing of resources our collaborative partners may devote to the product candidates. Our collaborative partners may experience financial difficulties. Should a collaborative partner fail to develop or commercialize a compound or product candidate to which it has rights from us, we may not receive any future milestone payments and will not receive any royalties for that compound or product candidate. Business combinations or significant changes in a collaborative partner’s business strategy may also adversely affect a partner’s willingness or ability to complete its obligations under an arrangement. If we fail to enter into additional collaborative agreements on favorable terms, our business, financial condition and results of operations could be materially adversely affected.

It may be difficult for us to retain our current employees and identify, hire and retain future employees.

Our future success depends in part upon our ability to attract and retain highly skilled personnel. Several factors could make it difficult for us to achieve this, including our current cash position and ability to continue our on-going concerns without additional capital. Competition among numerous companies, academic and other research institutions for skilled personnel and experienced scientists may be intense and turnover rates high. The cost of living in the San Francisco Bay Area is high compared to other parts of the country, which could adversely affect our ability to compete for qualified personnel and increase our costs. We have encountered and expect to continue to encounter increasing difficulty attracting qualified personnel.

 

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In addition, we may have difficulty attracting and retaining personnel as a result of having carried out six workforce reductions since 2007, the most recent of which was completed in 2013. In order to conserve resources, we expect to reduce headcount further during the next few months as additional activities are phased out or outsourced. These circumstances could significantly impede the achievement of our business objectives. Accordingly, we will be operating with a severe shortage of resources and may not be able to conduct even limited operations. Even if we are able to obtain necessary funding and continue our business beyond May 2014, we may not have adequate personnel to operate our business or be able to attract and retain qualified employees.

If our competitors develop and market products that are more effective than our product candidates or any products that we may develop, or obtain marketing approval before we do, our commercial opportunity will be reduced or eliminated.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Some of the drugs that we are attempting to develop will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. We face competition from pharmaceutical and biotechnology companies in the United States and abroad. Our competitors may develop new screening technologies and may utilize discovery techniques or partner with collaborators in order to develop products more rapidly or successfully than we or our collaborators are able to do.

Many of our competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures, licensing arrangements or other collaborations. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competing products or technologies and may establish exclusive collaborative or licensing relationships with our competitors.

Our competitors may succeed in developing technologies and drugs that are more effective, better tolerated or less costly than any which are being developed by us or which would render our technology and potential drugs obsolete and noncompetitive. In addition, our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates more rapidly than us or our collaborators. Any drugs resulting from our research and development efforts, or from our joint efforts with our existing or future collaborative partners, may not be able to compete successfully with our competitors’ existing products or product candidates under development or may not obtain regulatory approval in the United States or elsewhere.

If we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators will not be permitted to commercialize our product candidates.

Even if we are able to achieve success in our preclinical testing, we, or our collaborators, must provide the FDA and foreign regulatory authorities with clinical data that demonstrate the safety and efficacy of our product candidates in humans before they can be approved for commercial sale. Failure to obtain regulatory approval will prevent commercialization of our product candidates.

The pharmaceutical industry is subject to stringent regulation by a wide range of regulatory authorities. We cannot predict whether regulatory clearance will be obtained for any product candidate that we are developing or hope to develop. A pharmaceutical product cannot be marketed in the United States until it has completed rigorous preclinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA. Satisfaction of regulatory requirements typically takes many years and depends on the type, complexity and novelty of the product candidate and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use.

 

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Before commencing clinical trials in humans, we, or our collaborators, must submit and receive approval from the FDA of an IND application. We must comply with FDA “Good Laboratory Practices” regulations in our preclinical studies. Clinical trials are subject to oversight by Institutional Review Boards, or IRBs, of participating clinical sites and the FDA and:

 

   

must be conducted in conformance with the FDA regulations;

 

   

must meet requirements for IRB approval;

 

   

must meet requirements for informed consent;

 

   

must meet requirements for Good Clinical Practices;

 

   

may require large numbers of participants; and

 

   

may be suspended by us, our collaborators or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the IND application or the conduct of these trials. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

Before receiving FDA clearance to market a product candidate, we, or our collaborators must demonstrate that the product candidate is safe and effective in the patient population that will be treated. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be repeated, a program to be terminated and could delay approval. We typically rely on third-party clinical investigators to conduct our clinical trials and other third-party organizations to perform data collection and analysis. As a result, we may face additional delaying factors outside our control. In addition, we may encounter delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy or interpretation during the period of product development, clinical trials and FDA regulatory review. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other regulatory action. We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval.

If regulatory clearance of a product candidate is granted, this clearance will be limited to those disease states and conditions for which the product candidate is demonstrated through clinical trials to be safe and efficacious, which could limit our market opportunity. Furthermore, product approvals, once granted, may be withdrawn if problems occur after initial marketing. We cannot ensure that any product candidate developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance. Regulatory clearance may also contain requirements for costly post-marketing testing and surveillance to monitor the safety and efficacy of the product candidate. If problems occur after initial marketing, such as the discovery of previously unknown problems with our product candidates, including unanticipated adverse events or adverse events of unanticipated severity or frequency, or manufacturer or manufacturing issues, marketing approval can be withdrawn.

Outside the United States, the ability to market a product depends on receiving a marketing authorization from the appropriate regulatory authorities. Most foreign regulatory approval processes include all of the risks associated with FDA clearance described above and some may include additional risks.

As our product programs advance, we may need to hire additional scientific and management personnel. Our research and development efforts will be seriously jeopardized if we are unable to attract and retain key personnel.

Our success depends in part on the continued contributions of our principal management and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions,

 

20


scientists and companies in the face of intense competition for such personnel. As we plan for additional advanced clinical trials, including Phase 2 and Phase 3, we may also need to expand our clinical development personnel. If we lose the services of Dr. Wick or any of our other key personnel, our research and development efforts could be seriously and adversely affected. We have generally entered into consulting or other agreements with our scientific and clinical collaborators and advisors. We do not carry key person insurance that covers Dr. Wick or any of our other key employees.

If we or our licensees cannot obtain and defend our respective intellectual property rights, or if our product candidates, technologies or any products that we may develop are found to infringe patents of third parties, we could become involved in lengthy and costly legal proceedings that could adversely affect our business.

Our success will depend in a large part on our own and our licensees’ ability to obtain and defend patents for each party’s respective technologies and the compounds and other products, if any, resulting from the application of these technologies. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. As a result, the degree of future protection for our proprietary rights is uncertain, and we cannot assure you that:

 

   

we were the first to make the inventions covered by each of our pending patent applications;

 

   

we were the first to file patent applications for these inventions;

 

   

others will not independently develop similar or alternative technologies or duplicate any of our technologies;

 

   

any of our pending patent applications will result in issued patents;

 

   

any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

   

any of our issued patents will be valid or enforceable; or

 

   

we will develop additional proprietary technologies that are patentable.

Accordingly, we cannot predict the breadth of claims allowed in our or other companies’ patents.

We are actively pursuing multiple life cycle patent applications for TELINTRA, including applications related to combination therapies, polymorphs, formulations, manufacturing processes and the genomic profiles of responders. We have been granted US and foreign patents for potent analogs of TELINTRA (expiry in 2026) and a US patent for the tablet formulation of TELINTRA (expiry in 2031). We have US and foreign patents pending on crystalline forms and polymorph form of TELINTRA (expiry in 2031); amorphous ansolvate form of TELINTRA (expiry in 2032); manufacturing process for TELINTRA crystalline form (expiry in 2031); dosing schedule and treatment methods for MDS with TELINTRA (expiry in 2031); the treatment of multiple myeloma with TELINTRA (expiry in 2032); and excipient compatibility with TELINTRA (expiry in 2032). One patent on treatment methods for MDS with TELINTRA was granted at the European Patent Office. Intention to grant has been received from the European Patent Office for a patent on dosing schedule and a patent on treatment methods for MDS with TELINTRA. We can generally apply for patent term extensions on the patents for TELINTRA when and if marketing approvals for these compounds are obtained in the relevant countries. In foreign countries, these extensions are available only if approval is obtained before the patent expires, but in the United States, extensions are available even if approval is obtained after the patent would expire normally through a system of interim extensions until approval.

We have US and foreign patents granted or pending on our pipeline drug development candidates TLK60404, TLK60357 and TLK60596. These patents will expire in 2029, 2030 and 2032 respectively. In addition, the primary patents that cover our TRAP drug discovery technology will expire in August, 2015.

 

21


Our success will also depend, in part, on our ability to operate without infringing the intellectual property rights of others. We cannot assure you that our activities will not infringe patents owned by others. To date, we have not received any communications with the owners of related patents alleging that our activities infringe their patents. However, if our product candidates, technologies or any products that we may develop are found to infringe patents issued to third parties, the manufacture, use and sale of any products that we may develop could be enjoined, and we could be required to pay substantial damages. In addition, we may be required to obtain licenses to patents or other proprietary rights of third parties. We cannot assure you that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to us, if at all. Failure to obtain such licenses could negatively affect our business.

Others may have filed and in the future may file patent applications covering small molecules or therapeutic products that are similar to ours. We cannot assure you that our patent applications will have priority over patent applications filed by others. Any legal action against us or our collaborators claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain a license to continue to manufacture or market the affected products and processes. We cannot predict whether we, or our collaborators, would prevail in any of these actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources, and we may not be successful in any such litigation.

In addition, we could incur substantial costs and use of our key employees’ time and efforts in litigation if we are required to defend against patent suits brought by third parties or if we initiate these suits, and we cannot predict whether we would be able to prevail in any of these suits.

Furthermore, some of our patents and intellectual property rights are owned jointly by us and our collaborators. While there are legal and contractual restraints on the rights of these joint owners, they may use these patents and other intellectual property in ways that may harm our business. We may not be able to prevent this type of use.

We also rely on trade secrets to protect technology, including aspects of our TRAP technology, where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators and consultants to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If the identity of specific proteins or other elements of our TRAP technology become known, our competitive advantage in drug discovery could be reduced.

Many of our collaborators and scientific advisors have publication and other rights to certain information and data gained from their collaborations and research with us. Any publication or other use could limit our ability to secure intellectual property rights or impair any competitive advantage that we may possess or realize by maintaining the confidentiality of that information or data.

If we are unable to enter into or maintain existing contracts with third parties to manufacture our product candidates or any products that we may develop in sufficient quantities and at an acceptable cost, clinical development of product candidates could be delayed and we may be unable to meet demand for any products that we may develop and lose potential revenue.

We do not currently operate manufacturing facilities for clinical or commercial production of our product candidates. We expect to continue to rely on third parties for the manufacture of our product candidates and any products that we may develop. We currently lack the resources and capability to manufacture any of our product

 

22


candidates on a clinical scale or any products that we may develop on a commercial scale. As a result, we will be dependent on corporate partners, licensees or other third parties for the manufacturing of clinical and commercial scale quantities of our product candidates and any products that we may develop. Our product candidates and any products that we may develop may be in competition with other product candidates and products for access to these manufacturing facilities. For this and other reasons, our collaborators or third parties may not be able to manufacture our product candidates and products in a cost effective or timely manner. While we currently possess sufficient inventory of TELINTRA that is stored in multiple locations, if this inventory is lost or damaged, the clinical development of our lead product candidate or its submission for regulatory approval could be delayed, and our ability to deliver any products that we may develop on a timely basis could be impaired or precluded.

Isochem has in the past manufactured and supplied a limited number of batches of the active ingredient to be used in the production of TELINTRA for use in clinical trials. As such, we have qualified Isochem as a potential source of supply for clinical quantities of this ingredient. In addition, Patheon has in the past performed formulation development and analytical services, and produced for us limited batches of clinical trial material, relating to the tablet formation of TELINTRA. As such, we have qualified Patheon as a potential manufacturer of TELINTRA tablets. However, we currently do not have in effect any manufacturing or supply agreements with either Isochem or Patheon. Although we have not qualified any other sources for the active ingredient in TELINTRA or the manufacture of TELINTRA tablets, we have evaluated, and may consider, potential alternative sources for this material in the future.

If manufacturing is not performed in a timely manner, if our suppliers fail to perform or if our relationships with our suppliers or manufacturers should terminate, our clinical trials and commercialization of TELINTRA could be delayed. We may not be able to enter into or maintain any necessary third-party manufacturing arrangements on acceptable terms, if at all. Our current dependence upon others for the manufacture of our product candidates and our anticipated dependence upon others for the manufacture of any products that we may develop may adversely affect our future profit margins and our ability to commercialize any products that we may develop on a timely and competitive basis.

Working capital constraints may force us to delay our efforts to develop certain product candidates in favor of developing others, which may prevent us from commercializing all product candidates as quickly as possible.

Because we have limited resources, and because research and development is an expensive process, we must regularly assess the most efficient allocation of our research and development budget. As a result, we have had to prioritize development candidates and may not be able to fully realize the value of some of our product candidates in a timely manner, as they will be delayed in reaching the market, if at all.

If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates and any products that we may develop.

The testing and marketing of medical products entail an inherent risk of product liability. Although we are not aware of any historical or anticipated product liability claims or specific causes for concern, if we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates and any products that we may develop. In addition, product liability claims may also result in withdrawal of clinical trial volunteers, injury to our reputation and decreased demand for any products that we may commercialize. We currently carry product liability insurance that covers our clinical trials up to a $10.0 million annual aggregate limit. We will need to increase the amount of coverage if and when we have a product that is commercially available. If we are unable to obtain sufficient product liability insurance at an acceptable cost, potential product liability claims could prevent or inhibit the commercialization of any products that we may develop, alone or with corporate partners.

 

23


We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:

 

   

establishing a classified board of directors requiring that members of the board be elected in different years, which lengthens the time needed to elect a new majority of the board;

 

   

authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares or change the balance of voting control and thwart a takeover attempt;

 

   

prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;

 

   

limiting the ability of stockholders to call special meetings of the stockholders;

 

   

prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and

 

   

establishing 90 to 120 day advance notice requirements for nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at stockholder meetings.

Substantial future sales of our common stock by us or by our existing stockholders could cause our stock price to fall.

Additional equity financings or other share issuances by us, including shares issued in connection with strategic alliances and corporate partnering transactions, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional sales could occur could cause the market price of our common stock to drop. Substantially all of our outstanding shares of common stock were freely tradable and, in limited cases, subject to certain volume, notice and manner of sale restrictions under Rule 144 of the Securities Act of 1933.

If we do not progress in our programs as anticipated, our stock price could decrease.

For planning purposes, we estimate the timing of a variety of clinical, regulatory and other milestones, such as when a certain product candidate will enter clinical development, when a clinical trial will be completed or when an application for regulatory approval will be filed. Our estimates are based on present facts and a variety of assumptions. Many of the underlying assumptions are outside of our control. If milestones are not achieved when we estimated that they would be, investors could be disappointed, and our stock price may decrease.

Our stock price may be volatile, you may not be able to resell your shares at or above your purchase price.

Our stock prices and the market prices for securities of biotechnology companies in general have been highly volatile, with recent significant price and volume fluctuations, and may continue to be highly volatile in the future. For example, our stock price dropped by 71% on the day following the announcement in December 2006 that the preliminary top-line results of our first three Phase 3 trials did not meet primary end-points. During the year ended December 31, 2013, our common stock traded between $1.05 and $3.05, and on December 31, 2013, our common stock closed at $1.19. You may not be able to sell your shares quickly or at the market price if

 

24


we are delisted from the Nasdaq Capital Market or if we are unable to transfer our listing to another stock market, or if trading in our stock is not active or the volume is low. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock, some of which are beyond our control:

 

   

developments regarding, or the results of, our clinical trials;

 

   

announcements of technological innovations or new commercial products by our competitors or us;

 

   

the issuance of equity or debt securities of the Company, or disclosure or announcements relating thereto;

 

   

developments concerning proprietary rights, including patents;

 

   

developments concerning our collaborations;

 

   

publicity regarding actual or potential medical results relating to products under development by our competitors or us;

 

   

regulatory developments in the United States and foreign countries;

 

   

litigation;

 

   

economic and other external factors or other disaster or crisis; or

 

   

period-to-period fluctuations in our financial results.

We have been, and in the future may be, subject to securities class action lawsuits and shareholder derivative actions. These, and potential similar or related litigation, could result in substantial damages and may divert management’s time and attention from our business.

We have been, and may in the future be, the target of securities class actions or shareholder derivative claims. Any such actions or claims could result in substantial damages and may divert management’s time and attention from our business.

 

Item 1B. Unresolved Staff Comments.

None

 

Item 2. Properties.

In November 2010, we relocated our corporate offices and entered into a 28-month lease agreement for 8,620 square feet of office space at 700 Hansen Way in Palo Alto, California which expired on March 31, 2013. We also concurrently leased approximately 92,000 square feet of research and office space located at 3165 Porter Drive in Palo Alto, which we subleased to a tenant effective November 2010 through May 2014.

On February 19, 2013, we entered into an agreement with the building landlord of the facility located at 3165 Porter Drive, ARE-San Francisco No. 24, LLC, or ARE, an affiliate of Alexandria Real Estate Equities, Inc., pursuant to which the lease and sublease of such facility are terminated as of February 28, 2013. On February 27, 2013, we entered into a 21-month lease for 3,075 square feet of office space at 2100 Geng Road, Suite 102, Palo Alto, California and relocated our corporate offices from 700 Hansen Way to this facility.

 

Item 3. Legal Proceedings.

None.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

25


PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Our Common Stock

Our common stock trades on the Nasdaq Capital Market under the symbol “TELK”. The following table sets forth the high and low sales prices for our common stock for each quarterly period within the two most recent fiscal years. All stock prices included in the following table are adjusted for the 1-for 30 reverse stock split effected on March 30, 2012.

 

     High      Low  

2013

     

Quarter ended March 31, 2013

   $ 3.05       $ 1.33   

Quarter ended June 30, 2013

   $ 1.75       $ 1.17   

Quarter ended September 30, 2013

   $ 1.63       $ 1.05   

Quarter ended December 31, 2013

   $ 2.15       $ 1.17   

2012

     

Quarter ended March 31, 2012

   $ 7.50       $ 3.75   

Quarter ended June 30, 2012

   $ 7.34       $ 2.00   

Quarter ended September 30, 2012

   $ 3.05       $ 1.44   

Quarter ended December 31, 2012

   $ 2.81       $ 1.09   

As of February 22, 2014, there were 54 stockholders of record of our common stock. We have never paid our stockholders cash dividends, and we do not anticipate paying any cash dividends in the foreseeable future as we intend to retain any earnings for use in our business. Any future determination to pay dividends will be at the discretion of our board of directors.

 

26


Performance Graph

The following graph compares our cumulative total stockholder return for the past five years to two indices: the Nasdaq U.S. Index and the Nasdaq Pharmaceutical Stocks Index. This graph assumes the investment of $100 on December 31, 2008 in our common stock, the Nasdaq U.S. Index; and the Nasdaq Pharmaceutical Stocks Index. All values assume reinvestment of the full amount of all dividends and are calculated as of the last stock trading day of each year:

 

LOGO

 

     December 31,
2008
     December 31,
2009
     December 31,
2010
     December 31,
2011
     December 31,
2012
     December 31,
2013
 

Telik, Inc.

   $ 100       $ 206       $ 200       $ 52       $ 11       $ 10   

Nasdaq U.S. Index

     100         144         170         171         202         282   

Nasdaq Pharmaceutical Stocks Index

     100         112         122         130         173         286   

Source: Nasdaq.net. The information under “Performance Graph” is not deemed to be “soliciting material” or “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended and is not to be incorporated by reference in any filing of Telik under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in those filings.

 

27


Item 6. Selected Financial Data.

The following selected historical information has been derived from the audited financial statements of Telik and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results of operations to be expected in the future.

 

     Years Ended December 31,  
     2013     2012     2011     2010     2009  
     (In thousands, except per share amounts)  

Statement of Operations Data:

          

Operating costs and expenses:

          

Research and development

     1,996        3,524        5,566        11,040        12,723   

General and administrative

     3,245        4,455        6,491        9,230        10,810   

Facility exit costs

     —          —          —          5,360        —     

Restructuring costs

     —          —          —          425        951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     5,241        7,979        12,057        26,055        24,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (5,241     (7,979     (12,057     (26,055     (24,484

Interest income and other, net

     11        8        35        1,333        791   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,230   $ (7,971   $ (12,022   $ (24,722   $ (23,693
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share*

   $ (1.17   $ (3.64   $ (6.69   $ (13.85   $ (13.32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to calculate basic and diluted net Loss per share*

     4,480        2,188        1,798        1,785        1,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*   Adjusted for the 1-for-30 reverse stock split as discussed in Notes 1 and 7 in the Notes to Financial Statements.

 

     As of December 31,  
     2013     2012     2011     2010     2009  
     (In thousands)  

Balance Sheet Data:

          

Cash, cash equivalents, investments and restricted Investments

   $ 2,229      $ 4,997      $ 11,700      $ 24,064      $ 40,400   

Working capital

     1,655        3,253        9,422        20,736        39,221   

Total assets

     2,610        5,628        12,412        25,029        46,153   

Current portion of obligations and loans

     —          1,022        1,463        1,439        3,101   

Non-current portion of obligations, loans,and long-term liabilities

     —          441        1,463        2,923        —     

Accumulated deficit

     (553,530     (548,300     (540,329     (528,307     (503,585

Total stockholders’ equity

     1,655        3,062        8,299        18,369        40,934   

 

28


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Telik is 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.

We have incurred net losses since inception and expect to incur losses for the foreseeable future as we continue our research and development activities. During the year ended December 31, 2013, loss from operations was $5.2 million and net loss was $5.2 million. Net cash used in operations for the year ended December 31, 2013 was $6.1 million and net cash and cash equivalents at December 31, 2013 were $2.2 million. As of December 31, 2013, we had an accumulated deficit of $553.5 million.

Our expenses consist primarily of those incurred for research and development and general and administrative costs associated with our operations. The process of carrying out the development of our product candidates to later stages of development and our research programs will require significant additional research and development expenditures, including for preclinical testing and clinical trials, as well as for manufacturing development efforts and obtaining regulatory approval. We outsource our clinical trials and our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. To date, we have funded our operations primarily through the sale of equity securities, non-equity payments from collaborative partners and interest income.

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 generate revenues or achieve and sustain profitability in the future.

Since our inception, we have incurred significant net losses, and we expect to continue to incur net losses for the foreseeable future. The successful development of our product candidates is uncertain. As such, an accurate prediction of future operating results is difficult or impossible.

Going Concern

There is substantial doubt about our ability to continue as a going concern. Our financial statements filed in this Report were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be unable to continue as a going concern. While we were able to raise $3.6 million in 2013 through our At Market Issuance Sales Agreement, or Sales Agreement, with McNicoll, Lewis & Vlak LLC, or MLV, we believe our current existing cash resources will only be sufficient to fund our projected operating requirements through approximately May of 2014. The timing remains uncertain, however, and may change as a result of efforts to further conserve resources and/or reducing expenses. In order to continue as a going concern, we will require substantial additional financing to fund our current and future operations and continue our clinical product development programs, and our ability to continue as a viable entity will be dependent on our ability to obtain this funding in a timely manner. As of the date of this report we are unlikely to be able to raise sufficient funds to continue our existing operations beyond May 2014. Our ability to continue as a going concern is subject to

 

29


significant uncertainty, including but not limited to, the level of progress of our current clinical development plan with respect to a Phase 3 placebo-controlled randomized registration trial of TELINTRA for the treatment of Low to Intermediate-1 risk MDS and our ability to raise adequate capital to fund this trial given our limited cash resources. We have been and are currently seeking collaborative arrangements with corporate partners to fund the development and commercialization of TELINTRA. However, we cannot provide any assurances that we will be successful in closing a collaborative arrangement in a timely manner, if at all. As a result, we have retained a financial advisory firm to explore and recommend strategic alternatives for us going forward. This firm is expected to present alternatives for maximizing the value of our assets in the near-term. Those alternatives could include partnerships on one or more of our product candidates, merger with or acquisition by another company, further restructuring of the company, the sale of company assets, in whole or in part, ceasing operations, or some other arrangement through which the value of our assets to stockholders could be optimized. In order to conserve resources to allow for time to pursue the above strategic alternatives, in 2013, we:

 

   

terminated the master lease agreement on a facility, which consists of approximately 92,000 square feet of research and office space, located at 3165 Porter Drive in Palo Alto, California and paid a termination fee of $0.7 million in connection therewith. If we receive $15 million or more in additional financing, an additional termination fee of $0.6 million will be due, but otherwise forgiven;

 

   

relocated our corporate offices from 700 Hansen Way, an 8,620 square feet office space, to 2100 Geng Road, a 3,075 square feet office space, resulting in a reduction of approximately 66% in monthly rent expenses;

 

   

stopped further enrollment of and ended all ongoing Phase 2 clinical trials of TELINTRA and contracts related to those activities; and

 

   

reduced our staff by approximately 29% from 17 persons to 12 by eliminating most of our research and development, manufacturing, clinical and regulatory activities and personnel. We expect to reduce headcount further during the next few months as additional activities are phased out or outsourced.

We cannot assure you that any actions that we take will raise or generate sufficient capital to fully address the significant uncertainties of our financial position. Moreover, we may not successfully identify or implement any of these alternatives, and, even if we determine to pursue one or more of these alternatives, we may be unable to do so on a timely basis or on acceptable financial terms. As a result, we may be unable to realize value from our assets and discharge our liabilities in the normal course of business. All of these factors raise substantial doubt about our ability to continue as a going concern.

Clinical Product Development

TELINTRA, our lead drug product candidate in clinical development, is a small molecule glutathione analog inhibitor of the enzyme glutathione S-transferase P1-1, or GST P1-1. We are developing TELINTRA for the treatment of blood disorders that are characterized by defects in blood formation with associated low blood cell levels, such as anemia, neutropenia or thrombocytopenia. We completed an 86 patient Phase 2 clinical trial of TELINTRA tablets, for the treatment of patients with myelodysplastic syndrome, or MDS, a hematologic cancer characterized by ineffective red blood cell production requiring large numbers of transfusions to support the patient. We presented the results at the annual meeting of the American Society of Hematology, or ASH, in December 2010. In addition, we completed a Phase 1 dose-ranging study of TELINTRA tablets in combination with Revlimid in patients with MDS and presented the results at the annual meeting of ASH in December 2011.

In the second quarter of 2009, we initiated a Phase 2 trial of TELINTRA in patients with severe chronic neutropenia, or SCN, a rare blood disorder characterized by low levels of circulating white blood cells resulting in patients having multiple life threatening infections. Due to the scarcity of SCN patients and our focus on MDS, this study has been terminated and final study reconciliation completed in the fourth quarter of 2013.

In 2012, we applied for orphan drug eligibility for TELINTRA for the treatment of MDS and were granted that designation by the US Food and Drug Administration, or FDA, in January 2013. We also completed an End

 

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of Phase 2 meeting with the FDA in January 2013 and in accordance with the FDA’s guidance, we have now completed the design of 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. In order to focus our resources on the TELINTRA MDS registration program, we stopped further enrollment and terminated two of our Phase 2 clinical trials initiated in 2011, one to evaluate TELINTRA in patients with Revlimid refractory or resistant, deletion 5q MDS, and the other in patients with transfusion dependent, non-deletion 5q MDS, who have not been treated with prior hypomethylating agents. We will require substantial additional capital in order to initiate a Phase 3 registration trial of TELINTRA and we cannot provide any assurance that we will be successful in obtaining this funding.

TELCYTA, our other product candidate, is a small molecule cancer drug product candidate designed to be activated in cancer cells. TELCYTA has been evaluated in multiple Phase 2 and Phase 3 clinical trials, including trials using TELCYTA as monotherapy and in combination regimens in ovarian, non-small cell lung, breast and colorectal cancer. Results from these clinical trials indicate that TELCYTA monotherapy was generally well-tolerated, with mostly mild to moderate side effects. Clinical activity was reported in the TELCYTA Phase 2 trials; however, TELCYTA did not meet its primary endpoints in the Phase 3 studies. In May 2010, we initiated an investigator led study at a single site of TELCYTA in patients with refractory or relapsed mantle cell lymphoma, diffuse large B cell lymphoma, and multiple myeloma. Based on responses observed, we had planned to expand the study to stage 2 and add a second investigator site in the first quarter of 2012. However, in an effort to focus our resources on TELINTRA development, we terminated the development of TELCYTA and the IND was withdrawn in 2012.

Preclinical Drug Product Development

TLK60404—Aurora Kinase/VEGFR Inhibitors

We have a small molecule compound inhibiting both Aurora kinase and VEGFR kinase. Aurora kinase is a signaling enzyme whose function is required for cancer cell division, while VEGF plays a key role in tumor blood vessel formation, ensuring an adequate supply of nutrients to support tumor growth. The lead compounds of our first dual inhibitor program met a development milestone in August 2008 by demonstrating anticancer activity in preclinical models of human colon cancer and human leukemia. These lead compounds prevented tumor growth in preclinical models of human colon cancer and human leukemia by inhibiting both Aurora kinase and VEGFR kinase. Our data support the concept that dual inhibition of Aurora kinase and VEGFR kinase represents a promising approach for anticancer therapy. A development drug product candidate, TLK60404, has been selected. While we have conducted some preclinical safety studies, we have placed this development program on hold in an effort to conserve resources.

TLK60357—Antimitotic Agent

Using our TRAP technology, we have discovered TLK60357, a novel, potent small molecule inhibitor of cell division. TLK60357 inhibits the formation of microtubules that are necessary for cancer cell growth leading to persistent cancer cell block and subsequent cell death at the G2/M cell cycle. This compound demonstrates potent broad-spectrum anticancer activity against a number of human cancer cells. This compound also displays oral efficacy in multiple, standard preclinical models of cancer. Since we are currently focused on TELINTRA development, no additional expenditure on this compound is expected for the foreseeable future.

TLK60596—VEGFR Inhibitor

TLK60596, a potent VGFR kinase inhibitor, blocks the formation of new blood vessels in tumors. Oral administration of TLK60596 to animal models of human colon cancer significantly reduced tumor growth. Since we are currently focused on TELINTRA development, no additional expenditure on this compound is expected for the foreseeable future.

 

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Reverse Stock Split

On March 30, 2012, we effected a 1-for-30 reverse stock split of our outstanding common stock. The reverse stock split affected all stockholders of our common stock uniformly and did not materially affect any stockholder’s percentage of ownership interest. The par value of our common stock remains unchanged at $0.01 per share and the number of authorized shares of common stock remains the same after the reverse stock split. See Notes 1 and 7 in the Notes to Financial Statements for additional information.

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.

We are striving to evidence compliance with the stockholders’ equity requirement; however, there can be no assurance that we will be able to do so prior to the date specified by the Panel. If we are unable to maintain our listing on the Nasdaq Capital Market, the liquidity of our common stock would be seriously limited.

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 U.S. generally accepted accounting principles. 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 revenue recognition and clinical development 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.

While our significant accounting policies are more fully described in Note 2 to our financial statements appearing at the end of this Annual Report on Form 10-K, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.

Fair Value Measurements

We invest our excess cash in money market funds, cash deposits and debt instruments of the U.S. government agency securities. In the current market environment, the assessment of the fair value of the debt securities can be difficult and subjective. Accounting Standards Codification, or ASC, 820, “Fair Value Measurements and Disclosure”, establishes three levels of inputs that may be used to measure fair value The

 

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standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

  Level 1   Quoted prices in active markets for identical assets or liabilities;

 

  Level 2   Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

  Level 3   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.

Stock-based Compensation Expense

We use the fair value method under ASC 718, “Compensation—Stock Compensation” to account for share-based payment awards following the modified prospective method of adoption which provided for certain changes to the method for valuing stock-based compensation. Under ASC 718, employee stock-based compensation is estimated at the date of grant based on the employee stock award’s fair value using the Black-Scholes option-pricing model and is recognized as expense ratably over the requisite service period in a manner similar to other forms of compensation paid to employees. The Black-Scholes option-pricing model requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of the award. For the years 2013, 2012 and 2011, the expected volatilities were based solely on historical volatility data as there were insufficient traded option activities resulting from our declining stock price. The expected term of options granted is based on the simplified method in accordance with the Securities and Exchange Commission, or the SEC, Staff Accounting Bulletin, or SAB, Topic 14.D.2, as our historical share option exercise experience does not provide a reasonable basis for estimation. SAB Topic 14.D.2 provides guidance to issuers on the method allowed in developing estimates of expected term of “plain vanilla” share options in accordance with ASC 718. SAB Topic 14.D.2 allows companies to continue to use the simplified method, under certain circumstances, beyond December 31, 2007. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We evaluate our forfeiture rate to reflect actual historical and expected cancellations of unvested options periodically. See Note 7 in the Notes to Financial Statements for further information.

If factors change and we develop different assumptions in the application of ASC 718 in future periods, the compensation expense that we will then record may differ significantly from what we have recorded in the current period.

Exit and Disposal Activities

We record costs and liabilities associated with exit and disposal activities, as defined in ASC 420, “Exit or Disposal Cost Obligations”, at fair value in the period the liability is incurred. ASC 420 requires that the estimated future cash flows to be used in the fair value calculation be discounted using a credit-adjusted risk-free interest rate and that such interest rate shall have a maturity date that approximates the expected timing of future cash flows. Future cash flows related to lease obligations shall include the effect of sublease rental income and other lease operating expenses. In addition, accretion of the liability due to the passage of time is recorded as a general and administrative expense. See Note 5 in the Notes to Financial Statements for further information.

Research and Development Expenses

Our research and development expenses include salaries and benefits costs, fees for contractors, consultants and third-party contract research organizations, and an allocation of facility and administrative costs. Research

 

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and development expenses consist of costs incurred for drug and product development, manufacturing, clinical activities, discovery research, screening and identification of product candidates, and preclinical studies. All such costs are charged to research and development expenses as incurred.

Clinical development costs are a significant component of research and development expenses. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the on-going development of our product candidates. The financial terms of these contracts are subject to negotiation and may vary from contract to contract and may result in uneven payment flows. We accrue and expense costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed during a given period of time over the life of the individual study in accordance with agreements established with third-party contract research organizations and clinical trial sites. We determine our estimates through discussion with internal clinical personnel and third-party service providers of the progress or stage of completion of trials or services and the agreed upon fee to be paid for such services in each agreement. These estimates may or may not match the actual services performed by the third-party organizations as measured by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the extent possible; however, if we underestimate activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods. Conversely, over estimation of activity levels could result in accrued expenses being reversed in future periods.

Use of Estimates

In preparing our financial statements to conform to generally accepted accounting principles, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results may differ from these estimates.

Results of Operations

Revenues

We had no collaborative research agreements in 2013, 2012 and 2011 and currently do not expect to record any revenue in the next twelve months. Future non-product revenues, if any, will depend upon the extent to which we enter into new collaborative research agreements and the amounts of payments relating to such agreements.

Research and Development Expenses

Research and development expenses for the years ended December 31, 2013, 2012 and 2011 were $2.0 million, $3.5 million and $5.6 million, respectively. Our research and development costs consist primarily of clinical trial site costs, clinical data management and statistical analysis support, drug storage and distribution, regulatory services and other outside services related to drug development.

 

     Years Ended December 31,      Annual Percent
Change
 
     2013      2012      2011      2013/2012     2012/2011  
     (in thousands, except percentages)  

Research and development

   $ 1,996       $ 3,524       $ 5,566         (43 )%      (37 )% 

Total research and development expenses for the year ended December 31, 2013 decreased by 43%, or $1.5 million, compared to the same period in 2012 primarily due to the following:

 

    decreased costs of $690,000 associated with headcount reduction, reduced stock-based compensation of approximately $193,000 and a $234,000 decrease due to lower allocated facility and IT costs; and

 

    a decrease of approximately $412,000 in our phase 2 clinical studies for TELCYTA and TELINTRA as we have stopped enrolling new patients and have closed out all our clinical sites in 2013.

 

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Total research and development expenses for the year ended December 31, 2012 decreased by 37%, or $2.0 million, compared to the same period in 2011 primarily due to the following:

 

    decreased costs of approximately $1.6 million associated with headcount reduction, and reduced consulting and stock compensation expenses;

 

    decreased clinical trial expenses of approximately $68,000 related to the completion of our Phase 2 TELINTRA tablets for MDS studies, $494,000 related to the close out of our Phase 1 dose-ranging trial of TELINTRA tablets in combination with Revlimid in MDS and Phase 2 TELCYTA trial in multiple myeloma clinical studies; and

 

    decreased clinical drug supply manufacturing costs of $106,000;

 

    offset by increased clinical development expenses of approximately $259,000 for our Phase 2 clinical trial to evaluate TELINTRA tablets in patients with Revlimid refractory or resistant, deletion 5q myelodysplastic syndrome, or del 5q MDS and our Phase 2b clinical trial to evaluate TELINTRA tablets in patients with transfusion dependent, non-deletion 5q MDS.

Stock-based compensation expense included in research and development expenses for the years ended December 31, 2013, 2012 and 2011 were $92,000, $285,000 and $715,000 respectively.

We expect our total research and development expenditures in the next twelve months to decrease since we have stopped enrolling new patients in our current phase 2 clinical studies and closed out all our clinical sites. We have completed the trial design of a Phase 3 placebo-controlled randomized registration trial of TELINTRA for the treatment of Low to Intermediate-1 risk MDS and are seeking additional capital to fund the program. In the event we are able to obtain sufficient funding to commence our Phase 3 registration trial, our total research and development expenditures will increase.

The following table summarizes our principal drug product candidate development initiatives:

 

     Related R&D Expenses
Years Ended December 31,
 

Product

   2013      2012      2011  
     (in thousands)  

TELINTRA

   $ 1,996       $ 2,933       $ 4,023   

TELCYTA

     —           591         1,509   

TLK60404

     —           —           34   
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 1,996       $ 3,524       $ 5,566   
  

 

 

    

 

 

    

 

 

 

The largest component of our total operating expenses is our on-going investment in our research and development activities and, in particular, the clinical development of our product candidate pipeline. The process of conducting the clinical research necessary to obtain FDA approval is costly and time consuming. Current FDA requirements for a new human drug to be marketed in the United States include:

 

   

the successful conclusion of preclinical laboratory and animal tests, if appropriate, to gain preliminary information on the product’s safety;

 

   

filing with the FDA of an IND, to conduct initial human clinical trials for drug candidates;

 

   

the successful completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate; and

 

   

filing by the company and acceptance and approval by the FDA of a NDA for a product candidate to allow commercial distribution of the drug.

In view of the factors mentioned above, we consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and

 

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clinical program may be impacted by a variety of factors, including, among others, the quality of the candidate, the validity of the target and disease indication, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. Due to these and other factors, it is difficult to give accurate guidance on the anticipated proportion of our research and development investments or the future cash inflows from these programs.

General and Administrative Expenses

 

     Years Ended December 31,      Annual Percent
Change
 
     2013      2012      2011      2013/2012     2012/2011  
     (in thousands, except percentages)  

General and administrative

   $ 3,245       $ 4,455       $ 6,491         (27 )%      (31 )% 

The decrease in general and administrative expenses of 27%, or $1.2 million in 2013, compared to the same period in 2012, was primarily due to a decrease of $958,000 in headcount, stock compensation and corporate administrative expenses and a decrease of $251,000 in legal and professional services expenses.

The decrease in general and administrative expenses of 31%, or $2.0 million in 2012, compared to the same period in 2011, was primarily due to a decrease of $991,000 in headcount, stock compensation and corporate administrative expenses and a decrease of $1.0 million in legal and professional services expenses.

Stock-based compensation expense included in general and administrative expenses for the years ended December 31, 2013, 2012 and 2011 were $134,000, $411,000 and $843,000, respectively.

We expect future general and administrative expenses to decrease as we undertake efforts to conserve cash.

Interest Income and Interest Expense

 

     Years Ended December 31,      Annual Percent
Change
 
         2013              2012              2011          2013/2012     2012/2011  
     (in thousands, except percentages)  

Interest and other income, net

   $ 11       $ 8       $ 35         38     (77 )% 

Interest and other income, net was $11,000, $8,000 and $35,000 for the years ended December 31, 2013, 2012 and 2011, respectively. The increase of approximately $3,000 in 2013 compared to the same period in 2012 was due to a gain of $8,000 from the sale of office equipment partially offset by a decrease in investment income of $5,000 resulting from lower investment cash balances.

The decrease of approximately $27,000 in 2012 compared to the same period in 2011 was due primarily to a decrease in investment income resulting from lower investment cash balances as well as low yields in our investments which are mainly held in US government agency securities.

Liquidity and Capital Resources

 

     2013     2012     2011  
     (In millions, except ratios)  

December 31:

      

Cash, cash equivalents, investments and restricted cash

   $ 2.2      $ 5.0      $ 11.7   

Working capital

   $ 1.7      $ 3.3      $ 9.4   

Current ratio

     2.7 :  1        2.5 :  1        4.6 : 1   

Year ended December 31:

      

Cash provided by (used in):

      

Operating activities

   $ (6.1   $ (8.7   $ (12.8

Investing activities

   $ —        $ 2.4      $ 13.6   

Financing activities

   $ 3.6      $ 2.0      $ 0.4   

 

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Sources and Uses of Cash. Due to the 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 sales of equity, collaborative arrangements with corporate partners, interest earned on investments and equipment lease financings. At December 31, 2013, we had available cash and cash equivalents of $2.2 million. Our cash and cash equivalents balances are held in a variety of interest-bearing instruments including obligations of U.S. government agencies and 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.

Cash Flows from Operating Activities. Cash used in operations for 2013 was $6.1 million compared to $8.7 million for the same period in 2012 and $12.8 million in 2011. Net loss of $5.2 million in 2013 included non-cash charges of $226,000 for stock-based compensation. Cash used in operations was impacted by a net reduction in accrued facility exit costs of $622,000 primarily due to our lease termination agreements for our Porter Drive facility which is detailed in Note 5 of the Notes to Financial Statements. Cash used in operations in 2013 also included a $608,000 reduction in accrued liabilities primarily due to payments related to our annual audit and franchise tax. Cash used in 2012 resulted from net loss of $8.0 million and included non-cash charges of $696,000 for stock-based compensation. Cash used in operations in 2012 included a $1.5 million reduction in accrued facility exit costs due to payments made on our Porter Drive facility which were partially offset by sublease payments received. Cash used in 2011 resulted from net loss of $12.0 million which included non-cash charges of $1.6 million for stock based compensation and $10,000 for depreciation. Cash used in operations in 2011 included an $823,000 reduction in accounts payable primarily due to payments related to our office relocation at the end of 2010 and a $1.4 million reduction in accrued facility exit costs due to payments made on our Porter Drive facility which were partially offset by sublease payments received.

Cash Flows from Investing Activities. Cash provided by investing activities for 2013 was $8,000 compared to $2.4 million for 2012 and $13.6 million for 2011. Cash provided in 2013 was primarily from $2.5 million in investment maturities offset by the purchase of available-for-sale investments of $2.5 million and the sale of property and equipment of $8,000. Cash provided in 2012 was primarily from $6.9 million in investment maturities partially offset by the purchase of available-for-sale investments of $4.5 million. Cash provided in 2011 was primarily from $23.7 million in investment maturities and $1.7 million in investment sales partially offset by the purchase of available-for-sale investments of $11.7 million.

Cash Flows from Financing Activities. Cash provided by financing activities for 2013 was approximately $3.6 million compared to $2.0 million provided in 2012 and $393,000 provided in financing activities in 2011. Cash provided by financing activities in 2013 of $3.6 million was from sales of our common stock under the Sales Agreement with MLV. Cash provided by financing activities in 2012 was due to net proceeds received from stock sales of $2.0 million under the Sales Agreement. Cash provided by financing activities in 2011 was primarily due to stock sales which included $149,000 in net proceeds received under the Sales Agreement and approximately $244,000 from stock purchases under our employee stock purchase plan and stock options exercise.

Working Capital. Working capital decreased to $1.7 million at December 31, 2013 from $3.3 million at December 31, 2012. The decrease in working capital was primarily due to our use of cash for our clinical studies and operating expenses and was partially offset by sales of our common stock under the Sales Agreement with MLV.

We believe our cash, cash equivalents and marketable securities as of December 31, 2013 will only be sufficient to fund our projected operating requirements through approximately May of 2014. In order to continue as a going concern, we will need substantial additional capital fund our current and future operations and continue our clinical product development programs, and our ability to continue as a viable entity will be dependent on our ability to obtain additional funding in a timely manner. We are uncertain about our ability to

 

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raise sufficient funds to continue our existing operations beyond May 2014. We have retained a financial advisory firm to explore and recommend strategic alternatives for us going forward. Those alternatives could include partnerships involving one or more of our product candidates, merger with or acquisition by another company, further restructuring of the company, the sale of company assets, in whole or in part, ceasing operations, or some other arrangement through which the value of our assets to stockholders could be optimized. We may raise funds through arrangements with collaborators or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently. Our future capital uses and requirements depend on numerous factors, including the following:

 

   

the progress and success of preclinical studies and clinical trials of our product candidates;

 

   

the progress and number of research programs in development;

 

   

the costs associated with conducting Phase 2 and 3 clinical trials;

 

   

the costs and timing of obtaining regulatory approvals;

 

   

our ability to establish, and the scope of, any new collaborations;

 

   

our ability to meet the milestones identified in our collaborative agreements that trigger payments;

 

   

the costs and timing of obtaining, enforcing and defending our patent and intellectual property rights; and

 

   

competing technological and market developments.

On August 30, 2011, we entered into the Sales Agreement with MLV whereby we may issue and sell shares of our common stock having an aggregate offering price up to $7.0 million, from time to time, through MLV as our sales agent. For the year ended December 31, 2013, we sold 1,893,896 shares of our common stock through MLV under the Sales Agreement and received approximately $3.6 million in net proceeds after deducting commissions and other related expenses. As of December 31, 2013, we have sold 2,782,887 shares of our common stock and received approximately $5.8 million in net proceeds since entering into the Sales Agreement leaving approximately $1.0 million in aggregate offering price of common stock that can be sold under the Sales Agreement with MLV.

Sale of our common stock pursuant to the Sales Agreement is subject to share volume limitations, market conditions and our continued listing on the Nasdaq Capital Market. In addition, our ability to raise additional capital may be dependent upon our continued listing on the Nasdaq Capital Market, and we cannot provide assurances that we will be able to maintain compliance with Nasdaq listing requirements. We cannot be certain that sufficient funds will be available to us when required or on satisfactory terms. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain of our products, technologies or potential markets, any of which could delay or require that we curtail our development programs or otherwise have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in significant ownership dilution to our existing stockholders.

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.

 

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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 $219,000 which represents the total rent due for the remaining term (May 1, 2013 through November 30, 2014).

We have a contractual obligation under the terms of our manufacturing supply agreement with AMRI Rennselaer, Inc., or AMRI, previously known as Organichem Corporation, wherein we are obligated to purchase a majority of our United States requirements for the active ingredient in TELCYTA for a number of years. However, we currently do not have any requirements for the active ingredient because we have ceased clinical development of TELCYTA in order to focus our resources on TELINTRA development. We have agreed on a pricing schedule for such supply, which will be subject to future renegotiation after a defined time period.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).

Recent Accounting Pronouncements

We do not believe there are any recently issued, but not yet effective, accounting standards that would have a significant impact on our financial position or results of operations.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The following discussion about our market risk exposure involves forward-looking statements. We do not use or hold derivative financial instruments, however we are exposed to market risk related to changes interest rates and market conditions.

Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio. To minimize the exposure due to adverse shifts in interest rates we maintain investments of shorter maturities. Our marketable securities portfolio is primarily invested in U.S. government agency securities with an average maturity of under one year and a minimum investment grade rating of A or A-1 or better to minimize credit risk. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments were sold prior to maturity. Through our money managers, we maintain risk management control systems to monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. We have operated primarily in the United States and all funding activities with our collaborators to date have been made in U.S. dollars. Accordingly, we do not have any exposure to foreign currency rate fluctuations.

 

Item 8. Financial Statements and Supplementary Data.

All information required by this item is included in Item 15 of Part IV of this Annual Report and is incorporated into this item by reference.

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

On August 19, 2013, Ernst & Young LLP, or Ernst & Young, our independent registered public accounting firm, advised us that it would decline to stand for re-appointment as our independent registered public accounting firm and would resign after completion of the interim review of our unaudited financial statements as of September 30, 2013 and for the three- and nine-month periods ended September 30, 2013 and 2012.

 

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The reports of Ernst &Young on our financial statements for the past two fiscal years ended December 31, 2012 and 2011 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

In connection with the audits of our financial statements for each of the two fiscal years ended December 31, 2012 and 2011, and in the subsequent interim period through August 19, 2013, (i) there were no disagreements with Ernst &Young on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst &Young would have caused Ernst &Young to make reference to the matter in their report. There were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K.

We engaged Burr Pilger Mayer, Inc., or BPM, effective November 12, 2013, as our new independent registered public accounting firm. The decision to engage BPM as our independent registered public accounting firm was previously approved by our Audit Committee. During each of the two fiscal years ended December 31, 2011 and 2012 and through November 12, 2013, the date of BPM’s engagement, we did not consult with BPM regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the our financial statements, and neither a written report was provided to us nor oral advice was provided by BPM that was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

 

Item 9A. Controls and Procedures.

(I) Evaluation of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting

Based on their evaluation as of December 31, 2013, our Chief Executive Officer and Vice President, Finance and Controller have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective.

There were no changes in our internal control over financial reporting during the year ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(II) Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management, including our Chief Executive Officer and Vice President, Finance and Controller, does not expect that our procedures or our internal controls will prevent or detect all error and all fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of our controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President, Finance and Controller, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—1992 Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the 1992 framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.

 

40


This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

 

Item 9B. Other Information.

None.

 

41


PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

BOARD OF DIRECTORS

Set forth below are name, age and biographical information for each member of Board of Directors.

DIRECTORS CONTINUING IN OFFICE UNTIL THE 2014 ANNUAL MEETING

Edward W. Cantrall, Ph.D., 82, has served as a member of the Board of Directors since May 2002. Dr. Cantrall has served as a consultant to biotechnology and genomics companies since May 1998. From November 1997 to May 1998, Dr. Cantrall served as Vice President and General Manager for Molecular Informatics, Inc., a subsidiary of the Perkin-Elmer Corporation, and prior to the acquisition of Molecular Informatics by Perkin-Elmer Corporation in November 1997, he served as President and Chief Executive Officer of Molecular Informatics. He was Chief Executive Officer and President of the National Center for Genome Resources from January 1995 to November 1996. From September 1986 to July 1994, Dr. Cantrall served as Vice President of Operations at Lederle Laboratories, a division of American Cyanamid Company, a pharmaceutical company which was subsequently acquired by Wyeth Laboratories, Inc. He has served as a member of the Board of Managers of The Health Enterprise Group since 2000. His fields of expertise include pharmaceutical development and manufacturing. Dr. Cantrall holds a Ph.D. degree in organic chemistry from the University of Illinois and an M.B.A. degree in industrial management from Fairleigh Dickinson University.

Steven R. Goldring, M.D., 70, has served as a member of the Board of Directors since May 2002. Dr. Goldring has served as Chief Scientific Officer of the Hospital for Special Surgery in New York since July 2006. From 1996 to July 2006, Dr. Goldring was a Professor of Medicine at Harvard Medical School and Chief of Rheumatology at Beth Israel Deaconess Medical Center. He has also served as the Director of the New England Baptist Bone and Joint Institute, in collaboration with the Beth Israel Deaconess Medical Center since its establishment in 1996. Dr. Goldring serves on the osteoporosis and rheumatology clinical advisory boards for Merck & Co., Inc. and Eli Lilly and Company, and serves as an advisor to numerous biotechnology companies. He has established a clinical research program at Beth Israel Deaconess Medical Center. Dr. Goldring has served as a consultant or Principal Investigator in the pharmaceutical industry and for National Institutes of Health sponsored research programs and as a consultant to numerous biotechnology and pharmaceutical companies. He received his medical training at Peter Bent Brigham Hospital and the Massachusetts General Hospital. He is the author of numerous scientific publications. Dr. Goldring holds an M.D. degree from Washington University School of Medicine.

DIRECTORS CONTINUING IN OFFICE UNTIL THE 2015 ANNUAL MEETING

Richard B. Newman, Esq., 75, has served as a member of the Board of Directors since April 2003. Mr. Newman is currently President and Treasurer of D&R Products Co., Inc., which designs, develops and manufactures orthopedic, vascular and other surgical medical devices and instruments for major medical device and instrument manufacturers in the United States and Europe. He has served in this role since 1983. Mr. Newman holds an A.B. degree from Harvard College and an LL.B. degree from the Harvard Law School.

DIRECTORS CONTINUING IN OFFICE UNTIL THE 2016 ANNUAL MEETING

Michael M. Wick, M.D., Ph.D., 68, has served as Chairman of the Board of Directors since January 2000. Dr. Wick has served as Chief Executive Officer since July 1999 and as President since June 1998. Dr. Wick served as Chief Operating Officer from December 1997 until June 1998, and as Executive Vice President, Research and Development, from December 1997 until June 1998. He has been a member of the Board of Directors since December 1997. Prior to joining us in December 1997, Dr. Wick was Senior Vice President of Research for CV Therapeutics, Inc., a public biotechnology company, from May 1995 until December 1997.

 

42


Dr. Wick served as Executive Director of oncology/immunology and clinical research at Lederle Laboratories from September 1990 until May 1995, and also directed the Cyanamid/Immunex joint oncology research program. Dr. Wick began his career at Harvard Medical School, where he served as an Associate Professor from July 1981 until June 1994 and Chief of the Melanoma Clinic and Laboratory of Molecular Dermatological Oncology at the Dana Farber Cancer Institute from September 1980 until September 1992. Dr. Wick holds a Ph.D. degree in Chemistry from Harvard University and an M.D. degree from Harvard Medical School.

EXECUTIVE OFFICERS

Set forth below are name, age and biographical information for each current executive officer.

William P. Kaplan, Esq., 60, has served as Vice President and General Counsel since February 2006 and Vice President, Legal Affairs since April 2003. Mr. Kaplan has also served as Corporate Secretary since May 2003. From 2000 to 2003, Mr. Kaplan was Vice President, General Counsel and Corporate Secretary of iPrint Technologies, a developer of Internet printing technology. Prior to iPrint, Mr. Kaplan served as Vice President and General Counsel of Resumix, a publisher of enterprise human resources software subsequently acquired by Yahoo!. He also served as General Counsel of Netcom On-Line Communication Services, an Internet service provider, and Ungermann-Bass, a global manufacturer of network and telecommunications equipment. Mr. Kaplan has practiced law since 1982. He holds a B.A. degree in mathematics from the University of California, Santa Barbara, and a Juris Doctor degree from the School of Law at the University of California, Davis.

Steven R. Schow, Ph.D., 64, has served as Vice President, Research since March 2000. He served as Senior Director of Medicinal Chemistry from March 1998 until March 2000. Prior to joining us, Dr. Schow served as a Director of Medicinal Chemistry at CV Therapeutics, Inc., a biotechnology company, from May 1995 to March 1998. He served as a Senior Group Leader at Lederle Laboratories, a division of American Cyanamid, from November 1991 until May 1995. Dr. Schow was a post doctoral fellow in organic chemistry at the University of California at Los Angeles and the University of Pennsylvania. Dr. Schow holds a Ph.D. degree in organic chemistry from the University of California at San Diego and a B.S. degree in chemistry from California State University, Los Angeles.

Wendy K. Wee, 61, joined us in October 2002 and has served as Vice President, Controller since August 2005, Principal Financial and Accounting Officer since December 2010, and Vice President, Finance since February 2011. Prior to joining us, Ms. Wee was the Senior Director of Finance and Controller at Connetics, a biotechnology company, from July 1996 to January 2000. She served as a corporate controller at SlamDunk Networks, Inc., a transaction delivery service provider, from September 2000 to September 2002, and as a corporate controller at iPrint Technologies, a developer of Internet printing technology, from February 2000 to August 2000. Prior to this, she held various management positions at Silicon Graphics, Inc., MIPS Computer Systems and Unisys Corporation. Ms. Wee holds a B.S. degree in business administration from San Jose State University and an M.B.A. degree from the University of Phoenix.

KEY PERSONNEL

Gail L. Brown, M.D., 63, has served as the Company’s Senior Vice President and Chief Medical Officer since November 2001. Dr. Brown has served as a consultant to the Company on matters related to clinical development of the Company’s product candidates since October 1998. Prior to joining the Company, Dr. Brown was a Managing Director at The Palladin Group, LP and Tanager Capital Group, LLC, entities specializing in investment advisory services, from January 2001 to October 2001. She was a co-founder and partner of Altair Capital Associates LLC, specializing in biotechnology investment advisory services, from November 1998 to January 2001. Dr. Brown has served as a consultant and a member of clinical and scientific advisory boards at numerous public and private biotechnology companies from 1995 to 2001. She began her career at the Harvard Medical School, where she served on the faculty in the Department of Medicine, Division of Hematology and

 

43


Oncology from 1980 to 1995. Dr. Brown received her M.D. degree from The University of Rochester School of Medicine and an M.B.A. degree in finance from St. Mary’s College of California School of Economics and Business Administration.

There are no family relationships among any of our directors or executive officers. Dr. Gail Brown is the spouse of Dr. Wick, our President, Chief Executive Officer and Chairman. No director has a contractual right to serve as a member of the Board of Directors. After review of all relevant transactions or relationships between each director, or any of his or her family members, our senior management and our Independent Registered Public Accounting Firm, the Board of Directors has determined that all of our directors are independent within the meaning of the applicable NASDAQ listing standards, except Dr. Wick, our Chairman of the Board of Directors, Chief Executive Officer and President.

BOARD OF DIRECTORS COMMITTEES AND MEETINGS

The Board of Directors has three committees: an Audit Committee, a Compensation Committee and a Nominating Committee.

The Audit Committee is currently composed of three outside directors: Drs. Cantrall and Goldring and Mr. Newman. The Audit Committee met four times and acted once by written consent during the fiscal year ended December 31, 2013. The Board of Directors periodically reviews the NASDAQ listing standards’ definition of independence for Audit Committee members and has determined that all members of our Audit Committee are independent (as independence is currently defined in Rule 5605(c)(2)(A) of the NASDAQ listing standards and Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended). The Board of Directors has determined that Dr. Cantrall qualifies as an “audit committee financial expert,” as defined in applicable SEC rules.

The Compensation Committee is currently composed of three outside directors: Dr. Cantrall, Dr. Goldring and Mr. Newman. Each of the members of the Compensation Committee is independent (as independence is currently defined in Rule 5605(a)(2) of the NASDAQ listing standards). The Compensation Committee met four times during the fiscal year ended December 31, 2013.

The Nominating Committee is currently composed of three outside directors: Dr. Cantrall, Dr. Goldring and Mr. Newman. All members of the Nominating Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the NASDAQ listing standards). The Nominating Committee met once during the fiscal year ended December 31, 2013.

The Board of Directors met four times and acted once by written consent during the last fiscal year. Each member of the Board of Directors attended 75% or more of the aggregate of the meetings of the Board of Directors held in the last fiscal year during the period for which he was a director and of the meetings of the committees on which he served, held in the last fiscal year during the period for which he was a committee member. It is our current policy to require directors to attend the Annual Meeting absent extraordinary circumstances. The 2013 Annual Meeting of Stockholders was attended by all the members of the Board of Directors.

STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS

The Nominating Committee of the Board of Directors has adopted a process by which stockholders may communicate with the Board of Directors or any of its individual directors. Stockholders who wish to communicate with the Board of Directors may do so by sending a written communication addressed as follows: Telik Board Communication, c/o Stockholder Communications Officer, 2100 Geng Road, Suite 102, Palo Alto, CA 94303. All communications must state the number of shares owned by the stockholder making the communication. Telik’s Stockholder Communications Officer, or SCO, will review each communication and

 

44


forward the communication to the Board of Directors, to any individual director to whom the communication is addressed, and/or to any other officer of the Company considered by the SCO to be appropriate.

CODE OF CONDUCT

We have adopted the Telik, Inc. Code of Conduct, a code of ethics with which every person who works for us is expected to comply, including without limitation our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Telik, Inc. Code of Conduct is filed as an exhibit to our Annual Report on Form 10-K for the period ended December 31, 2003 as filed on March 4, 2004, with the U.S. Securities and Exchange Commission, or SEC, and is incorporated herein by reference. If we make any substantive amendments to the Telik, Inc. Code of Conduct or grant to any of our directors or executive officers any waiver including any implicit waiver, from a provision of the Telik, Inc. Code of Conduct, we will disclose the nature of the waiver or amendment in a Current Report on Form 8-K.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and our other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

Based solely on a review of the copies of such forms furnished to us during 2013, SEC filings and certain written representations that no other reports were required during the fiscal year ended December 31, 2013, our officers, directors and greater than ten percent stockholders complied with all applicable Section 16(a) filing requirement.

 

Item 11. Executive Compensation.

2013 Summary Compensation Table

The following table sets forth, for the fiscal years 2013 and 2012, compensation awarded or paid to, or earned by, our Chief Executive Officer and our three other most highly compensated executive officers at December 31, 2013 (the “Named Executive Officers”).

 

Name and Principal Position

   Year        Salary ($)     Bonus ($)      Option
Awards
$
     All Other
Compensation
($)
     Total ($)  

Michael M. Wick

President, Chief Executive Officer and Chairman

    

 

2013

2012

  

  

      

 

344,000

400,667

(1) 

(1)(2) 

   

 

-0-

-0-

  

  

    

 

-0-

-0-

  

  

    

 

-0-

-0-

  

  

    

 

344,000

400,667

  

  

William P. Kaplan

Vice President, General Counsel and Corporate Secretary

    

 

2013

2012

  

  

      

 

236,000

245,333

  

(3) 

   

 

-0-

-0-

  

  

    

 

-0-

-0-

  

  

    

 

-0-

-0-

  

  

    

 

236,000

245,333

  

  

Steven R. Schow

Vice President, Research

    

 

2013

2012

  

  

      

 

213,333

204,667

(4) 

(5) 

   

 

-0-

-0-

  

  

    

 

-0-

-0-

  

  

    

 

-0-

-0-

  

  

    

 

213,333

204,667

  

  

Wendy K. Wee

Vice President, Finance and Controller

    

 

2013

2012

  

  

      

 

236,000

236,000

  

  

   

 

-0-

-0-

  

  

    

 

-0-

-0-

  

  

    

 

-0-

-0-

  

  

    

 

236,000

236,000

  

  

 

 

(1)   Dr. Wick is not compensated for his role as a director. The amount shown reflects salary earned as an employee only.

 

(2)   Effective May 1, 2012, Dr. Wick’s annual salary was reduced to $344,000 from $514,000 as part of an overall reduction in operating expenses which was approved by the Compensation Committee of the Board of Directors on April 27, 2012.

 

45


(3)   Effective May 1, 2012, Mr. Kaplan’s annual salary was reduced to $236,000 from $264,000 as part of an overall reduction in operating expenses which was approved by the Compensation Committee of the Board of Directors on April 27, 2012.

 

(4)   Effective June 1, 2013, Dr. Schow’s annual salary was increased to $240,000 from $176,000 which was approved by the Compensation Committee of the Board of Directors on May 14, 2013.

 

(5)   Effective May 1, 2012, Dr. Schow’s annual salary was reduced to $176,000 from $262,000 as part of an overall reduction in operating expenses which was approved by the Compensation Committee of the Board of Directors on April 27, 2012.

Grants of Plan-Based Awards in 2013

For fiscal year 2013, no grants were made to any Named Executive Officer under any plan.

Outstanding Equity Awards at 2013 Fiscal Year-End

The following table summarizes the number of outstanding equity awards held by each of our Named Executive Officers at December 31, 2013. Each option grant is shown separately for each Named Executive Officer. The vesting schedule for each option grant is shown following this table.

 

Name and Principal Position

   Option Grant
Date
    Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
     Number of
Securities
Underlying
Unexercised
Options (#)
Un-
exercisable
     Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
     Option
Exercise
Price per
Share ($)
     Option
Expiration
Date
 

Michael M. Wick

President, Chief Executive

Officer and Chairman

    

 

 

 

 

 

 

 

 

01/22/2004

12/10/2004

01/06/2005

03/10/2006

03/03/2008

03/03/2008

11/18/2009

11/18/2009

05/25/2011

  

  

  

  

(A) 

(B) 

(A) 

(B) 

  

   

 

 

 

 

 

 

 

 

5,000

5,000

4,167

4,667

11,667

-0-

18,333

-0-

16,667

  

  

  

  

  

  

  

  

  

    

 

 

 

 

 

 

 

 

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

  

    

 

3,333

10,000

  

  

    

 

 

 

 

 

 

 

 

723.90

565.80

567.90

609.00

65.70

65.70

23.70

23.70

20.70

  

  

  

  

  

  

  

  

  

    

 

 

 

 

 

 

 

 

01/22/2014

12/10/2014

01/06/2015

03/10/2016

03/03/2018

03/03/2018

11/18/2019

11/18/2019

05/25/2021

  

  

  

  

  

  

  

  

  

William P. Kaplan

Vice President, General
Counsel and Corporate Secretary

    

 

 

 

 

 

 

 

01/22/2004

12/10/2004

03/10/2006

02/27/2007

03/03/2008

11/18/2009

11/18/2009

05/25/2011

  

  

  

(A) 

(A) 

(A) 

(B) 

  

   

 

 

 

 

 

 

 

333

1,667

667

3,333

2,000

4,167

-0-

6,667

  

  

  

  

  

  

  

  

    

 

 

 

 

 

 

 

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

    
4,167
  
    

 

 

 

 

 

 

 

723.90

565.80

609.00

174.00

65.70

23.70

23.70

20.70

  

  

  

  

  

  

  

  

    

 

 

 

 

 

 

 

01/22/2014

12/10/2014

03/10/2016

02/27/2017

03/03/2018

11/18/2019

11/18/2019

05/25/2021

  

  

  

  

  

  

  

  

Steven R. Schow

Vice President, Research

    

 

 

 

 

 

 

 

01/22/2004

02/25/2004

12/10/2004

02/27/2007

03/03/2008

11/18/2009

11/18/2009

05/25/2011

  

  

  

(A) 

(A) 

(A) 

(B) 

  

   

 

 

 

 

 

 

 

1,667

834

1,667

2,000

2,333

6,667

-0-

7,500

  

  

  

  

  

  

  

  

    

 

 

 

 

 

 

 

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

    
1,667
  
    

 

 

 

 

 

 

 

723.90

711.60

565.80

174.00

65.70

23.70

23.70

20.70

  

  

  

  

  

  

  

  

    

 

 

 

 

 

 

 

01/22/2014

02/25/2014

12/10/2014

02/27/2017

03/03/2018

11/18/2019

11/18/2019

05/25/2021

  

  

  

  

  

  

  

  

 

46


Name and Principal
Position

   Option Grant
Date
    Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
     Number of
Securities
Underlying
Unexercised
Options (#)
Un-
exercisable
     Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
     Option
Exercise
Price per
Share ($)
     Option
Expiration
Date
 

Wendy K. Wee

Vice President, Finance and
Controller (Principal Financial and Accounting Officer)

    

 

 

 

 

 

 

 

 

01/22/2004

12/10/2004

08/24/2005

03/10/2006

02/27/2007

03/03/2008

11/18/2009

11/18/2009

05/25/2011

  

  

  

  

(A) 

(A) 

(A) 

(B) 

  

   

 

 

 

 

 

 

 

 

1,000

1,333

833

500

3,333

2,000

6,667

-0-

9,667

  

  

  

  

  

  

  

  

  

    

 

 

 

 

 

 

 

 

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

  

    
1,667
  
    

 

 

 

 

 

 

 

 

723.90

565.80

441.90

609.00

174.00

65.70

23.70

23.70

20.70

  

  

  

  

  

  

  

  

  

    

 

 

 

 

 

 

 

 

01/22/2014

12/10/2014

08/24/2015

03/10/2016

02/27/2017

03/03/2018

11/18/2019

11/18/2019

05/25/2021

  

  

  

  

  

  

  

  

  

 

Option Awards Vesting Schedule

Grant Dates

  

Vesting Schedule

3/3/2008(A)

   Options vest over four years: 25% of the shares vest one year after the date of grant and 1/48th of the shares vest monthly thereafter.

1/22/2004; 2/25/2004; 12/10/2004; 1/6/2005;

8/24/2005; 3/10/2006

   Options vest over four years: 50% of the shares vest two years after the date of grant and 1/48th of the shares vest monthly thereafter.

2/27/2007(A); 5/25/2011

   Options vest monthly over a period of two years after the date of grant.

3/3/2008(B)

   Vesting will be 100% upon the achievement of specified performance goals for a significant license agreement relating to a Company product candidate.

11/18/2009(A)

   Options vest over two years: 50% of the shares vest upon the first anniversary of the date of grant and 1/24th of shares vest monthly thereafter over the following 12 months.

11/18/2009(B)

   Vesting will be 100% upon the earlier of (a) the consummation of a change of control of Telik, Inc. as defined in the 2000 Incentive Plan, or (b) a determination by our Board of Directors that we have consummated a significant transaction involving one or more of its then clinical stage products.

EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL AGREEMENTS

We entered into an employment agreement with Michael M. Wick, M.D., Ph.D. in August 1999 upon his promotion to the position of Chief Executive Officer. In December 1999, Dr. Wick was elected Chairman of the Board of Directors effective January 2000. On December 17, 2008, we entered into an amended and restated employment agreement, or the Employment Agreement, with Dr. Wick to clarify the manner in which such employment agreement complies with the final regulations under Section 409A of the U.S. Internal Revenue Code. The Employment Agreement superseded and replaced the employment agreement entered into in August 1999. According to the Employment Agreement, either Telik, Inc. or Dr. Wick may terminate his employment at any time for any reason. If Dr. Wick is terminated without cause, he is entitled to receive as severance continued payment of his base salary and health care benefits for twelve months. We will also accelerate the vesting of his then unvested stock options as to the number of shares that would have vested in the ordinary course in the first twelve months

 

47


following his termination date, with such vesting effective as of his termination date. Dr. Wick’s benefits pursuant to the Employment Agreement are subject to his signing of a general waiver or release of Telik, Inc.

In February 2003, we adopted the Telik, Inc. Change of Control Severance Benefit Plan, or the Severance Plan. On December 17, 2008, the Compensation Committee of the Board of Directors adopted an amendment to the Severance Plan to clarify the manner in which such plan complies with the final regulations under Section 409A. The Severance Plan provides eligible participants with severance benefits in the event that a participant’s employment with Telik, Inc. is terminated, voluntarily or involuntarily, without cause within one year after a change of control, provided that the eligible participant signs a general waiver or release Telik, Inc. prior to receipt of the benefits. Such benefits include cash severance, payment of premiums under employee benefits plans, COBRA continuation coverage, accelerated vesting of unvested stock options and additional payments if the amounts which a participant would receive in connection with a change in control of Telik, Inc. would constitute a “parachute payment” or be subject to excise tax.

The Severance Plan provides that, to the extent designated by the Compensation Committee or the Chief Executive Officer, the Chief Operating Officer, Chief Financial Officer, Senior Vice Presidents, Vice Presidents and others would be eligible to participate in the Severance Plan. On February 21, 2003, the Board of Directors designated Dr. Wick as eligible to participate in the Severance Plan. Under the Severance Plan, Dr. Wick, as the Chief Executive Officer, is eligible to receive (1) full accelerated vesting of any unvested stock options then held, (2) a lump sum cash payment equal to two times the greater of: (i) the sum of his base salary and the greater of: (a) the annual cash bonus paid to him in the prior year; or (b) his Annual Target Bonus as in effect on the date of termination; or (ii) the sum of his base salary and the greater of: (a) the annual cash bonus paid to him in the prior year; or (b) his Annual Target Bonus as in effect immediately prior to the Change of Control; and (3) continuation of health benefits for up to 24 months and COBRA continuation coverage. Dr. Wick would also be entitled to additional payments if the amounts he would receive in connection with a change in control of Telik, Inc. would constitute a “parachute payment” or be subject to excise tax. Dr. Wick’s benefits under the Severance Plan, when applicable, will supersede the severance benefits under his employment contract.

On February 26, 2014, the Compensation Committee designated Gail L. Brown, M.D., William P. Kaplan, Esq., Steven R. Schow, Ph.D., and Wendy K. Wee as eligible to participate in the Severance Plan. Under the Severance Plan, each is eligible to receive (1) full accelerated vesting of any unvested stock options then held; (2) a lump sum cash payment equal to the greater of: (i) the sum of his or her base salary and the greater of: (a) the annual cash bonus paid to him or her in the prior year; or (b) his or her Annual Target Bonus as in effect on the date of termination; or (ii) the sum of his or her base salary and the greater of: (a) the annual cash bonus paid to him or her in the prior year; or (b) his or her Annual Target Bonus as in effect immediately prior to the Change of Control; and (3) continuation of health benefits for up to 12 months and COBRA continuation coverage. Each would also be entitled to additional payments if the amounts he or she would receive in connection with a change in control of Telik, Inc. would constitute a “parachute payment” or be subject to excise tax.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE

The following table provides information on severance benefits that would become payable upon a change in control of the Company and subsequent involuntary separation from service within twelve months after the change in control under the Severance Plan and Dr. Wick’s Employment Agreement. The amounts shown assume that the employment of the eligible participants terminated on December 31, 2013 and are based on their compensation and the Company’s closing stock price ($1.19 per share) as of such date.

 

48


Name

   Voluntary Termination or
Involuntary Termination Without
Cause After A Change of Control
     Involuntary Termination Without
Cause
 
   Health
Care
Benefits
($)
     Salary
($) (1)
     Equity
Acceleration
($) (2)
     Health
Care
Benefits
($)
     Salary
($)
     Equity
Acceleration
($) (2)
 

Michael M. Wick

     22,906         688,000         -0-         11,453         344,000         -0-   

Gail L. Brown

     11,527         272,000         -0-         -0-         -0-         -0-   

William P. Kaplan

     35,390         236,000         -0-         -0-         -0-         -0-   

Steven R. Schow

     210         240,000         -0-         -0-         -0-         -0-   

Wendy K. Wee

     11,527         236,000         -0-         -0-         -0-         -0-   

 

(1)   Amounts shown are the maximum potential payment the executive would have received as of December 31, 2013. Amounts of parachute payment, if any, would be calculated at actual termination.

 

(2)   Represents the excess of closing fair market value of the shares accelerated vested and exercisable on December 31, 2013 over the aggregate exercise price of such shares.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth certain information regarding the ownership of our common stock by: (a) each director; (b) each of the executive officers named in the Summary Compensation Table and (c) all our executive officers and directors as a group. We are not aware of any beneficial owners of more than five percent of our common stock. All of the information in this table is as of March 1, 2014, unless otherwise noted in the appropriate footnote to the table.

Pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended, shares are deemed to be beneficially owned by a person if that person has the right to acquire shares (for example, upon exercise of an option) within sixty days of the date that information is provided. In determining the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by the person (and only that person) by reason of such acquisition rights. As a result, the percentage of outstanding shares held by any person in the table below does not necessarily reflect the person’s actual voting power. As of March 1, 2014, there were 4,583,096 shares of common stock outstanding.

 

Beneficial Owner (1)

   Number  of
Shares
Owned

(2)
    Right to
Acquire
Within 60
Days (3)
    Beneficial
Ownership
Total
     Percent of
Total
 

Michael M. Wick, M.D., Ph.D.

     6,973 (4)      103,002 (5)      109,975         2.35

William P. Kaplan, Esq.

     89        18,501        18,590         *   

Steven R. Schow, Ph.D.

     1,712 (6)      20,167        21,879         *   

Wendy K. Wee

     1,075        24,333        25,408         *   

Edward W. Cantrall, Ph.D.

     2,333 (7)      1,751        4,084         *   

Steven R. Goldring, M.D.

     —          1,751        1,751         *   

Richard B. Newman, Esq.

     782 (8)      1,751        2,533         *   

All executive officers and directors as a group (7 persons)

     12,964        171,256        184,220         3.87

 

  *   Less than one percent.

 

  (1)  

This table is based upon information supplied by officers and directors and Form 4s filed with the SEC. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on

 

49


 

4,583,096 shares outstanding on March 1, 2014. Unless otherwise indicated, the address of each of the individuals in this column is: c/o Telik, Inc. 2100 Geng Road, Suite 102, Palo Alto, CA 94303.

 

  (2)   Excludes shares issuable pursuant to stock options exercisable within 60 days of March 1, 2014.

 

  (3)   Shares issuable pursuant to stock options exercisable within 60 days of March 1, 2014.

 

  (4)   Includes 1,560 shares held by Dr. Wick’s spouse.

 

  (5)   Includes 42,500 shares issuable to Dr. Wick’s spouse pursuant to stock options exercisable within 60 days of March 1, 2014.

 

  (6)   Shares are held under the Schow-Hamlin Living Trust, of which Dr. Schow and his wife are Trustees.

 

  (7)   Shares are held in a joint account with Dr. Cantrall’s wife.

 

  (8)   Includes 500 shares held by the D&R Products Co., Inc. 401(k) and Profit Sharing Plan, of which Mr. Newman and his spouse are trustees.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Gail L. Brown, M.D., the spouse of Dr. Wick, our President, Chief Executive Officer and Chairman, joined us as Senior Vice President and Chief Medical Officer on November 26, 2001. Dr. Brown’s annual salary was reduced to $272,000 from $406,000 effective May 1, 2012 as part of an overall reduction in operating expenses which was approved by the Compensation Committee of the Board of Directors on April 27, 2012. Dr. Brown’s annual salary remained at $272,000 in 2013. There were no stock options granted to Dr. Brown in 2012 and 2013.

We have entered into indemnification agreements with our directors and certain officers for the indemnification and advancement of expenses to these persons to the fullest extent permitted by law. We also intend to enter into these agreements with future directors and officers.

 

Item 14. Principal Accounting Fees and Services

The following summarizes the fees billed by our independent registered public accounting firms for audit, tax and other professional services for the years ended December 31, 2013 and 2012:

 

     December 31,  
     2013      2012  
     Ernst &
Young LLP
     Burr Pilger
Mayer, Inc.
     Ernst &
Young LLP
 

Audit Fees(1)

   $ 105,450       $ 87,650       $ 357,000   

Audit-Related Fees(2)

     —           —           —     

Tax Fees(3)

     —           —           —     

All Other Fees(4)

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Fees

   $ 105,450       $ 87,650       $ 357,000   
  

 

 

    

 

 

    

 

 

 

 

  (1)   Audit Fees were for services associated with the annual audit and the reviews of our Annual Report on Form 10-K and our quarterly reports on Form 10-Q.

 

  (2)   There were no audit-related fees billed for the fiscal years ended December 31, 2013 and 2012.

 

  (3)   Tax Fees would be for services in connection with tax compliance, tax planning and tax advice. We incurred no such fees in the fiscal years ended December 31, 2013 and 2012.

 

  (4)   There were no other fees for services by our independent registered public accounting firms for the fiscal years ended December 31, 2013 and 2012.

 

50


PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this Annual Report:

 

  1.   Financial Statements. Our financial statements and the Report of Independent Registered Public Accounting Firm, are included in Part IV of this Report on the pages indicated:

 

     Page  

Report of Independent Registered Public Accounting Firm

     55   

Balance Sheets

     57   

Statements of Operations and Comprehensive Loss

     58   

Statement of Stockholders’ Equity

     59   

Statements of Cash Flows

     60   

Notes to Financial Statements

     61   

 

  2.   Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

 

  3.   Exhibits:

 

Exhibit
Number

    

Description

    3.1      

Amended and Restated Certificate of Incorporation. (2)

    3.2      

Certificate of Amendment to Amended and Restated Certificate of Incorporation (16)

    3.3      

Amended and Restated Bylaws. (10)

    3.4      

Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock. (5)

    3.5      

Registrant’s Certificate of Elimination with respect to Series A Junior Participating Preferred Stock. (18)

    4.1      

Specimen Common Stock Certificate. (1)

  10.1      

Form of Indemnity Agreement. (1) (3)

  10.2      

2011 Equity Incentive Plan and related documents. (3)(13)

  10.3      

2000 Equity Incentive Plan and related documents. (3) (4)

  10.4      

2000 Employee Stock Purchase Plan and Offering. (3) (4)

  10.5      

2000 Non-Employee Directors’ Stock Option Plan and Agreement. (3) (11)

  10.6      

Form of Non-Plan Stock Option Agreement. (3) (4)

  10.7      

Telik, Inc. Executive Officer Bonus Plan. (3)(9)

  10.8      

Amended and Restated Employment Agreement between Michael M. Wick, M.D., Ph.D. and Telik, dated December 17, 2008, as amended. (3) (12)

  10.9      

Agreement for Termination of Lease and Voluntary Surrender of Premises dated February 19, 2013, by and between Telik and ARE-San Francisco No. 24, LLC. (6)

  10.10      

Sublease between Telik and Boomerang.com, Inc. dated February 27, 2013 (17)

  10.11      

Lease, between Telik and Aricent US, Inc., dated November 22, 2010. (14)

  10.12   

Manufacturing Supply Agreement dated July 1, 2004, by and between Telik and Organichem Corporation. (7)

  10.13      

Telik, Inc. Change of Control Severance Benefit Plan, dated February 21, 2003, amended December 17, 2008. (3) (12)

 

51


Exhibit
Number

    

Description

  10.14      

At Market Issuance Sales Agreement, dated August 30, 2011, by and between Telik, Inc., and McNicoll, Lewis & Vlak LLC. (15)

  14.1      

Telik, Inc. Code of Conduct. (8)

  23.1      

Consent of Independent Registered Public Accounting Firm.

  23.2      

Consent of Independent Registered Public Accounting Firm.

  24.1      

Power of Attorney (included on the signature pages hereto)

  31.1      

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

  31.2      

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

  32.1      

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

  101.INS      

XBRL Instance Document

  101.SCH      

XBRL Taxonomy Extension Schema Document

  101.CAL      

XBRL Taxonomy Extension Calculation Document

  101.DEF      

XBRL Taxonomy Definition Linkbase Document

  101.LAB      

XBRL Taxonomy Extension Labels Linkbase Document

  101.PRE      

XBRL Taxonomy Extension Presentation Link Document

 

*   Confidential treatment has been granted for portions of this document. The information omitted pursuant to such confidential treatment order has been filed separately with the Securities and Exchange Commission.

 

(1)   Incorporated by reference to exhibits to our Registration Statement on Form S-1, filed on April 3, 2000, as amended (File No. 333-33868).

 

(2)   Incorporated by reference to exhibits to our Annual Report on Form 10-K for the year ended December 31, 2001, as filed on March 27, 2002.

 

(3)   Management contract or compensatory arrangement.

 

(4)   Incorporated by reference to exhibits to our Registration Statement on Form S-8, as filed on August 30, 2000 (File No. 333-44826).

 

(5)   Incorporated by reference to exhibits to our Current Report on Form 8-K dated November 2, 2001, as filed on November 5, 2001.

 

(6)   Incorporated by reference to exhibits to our Current Report on Form 8-K dated February 19, 2013, as filed on February 22, 2013.

 

(7)   Incorporated by reference to exhibits to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, as filed on November 8, 2004.

 

(8)   Incorporated by reference to exhibits to our Annual Report on Form 10-K for the year ended December 31, 2003, as filed on March 5, 2004.

 

(9)   Incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for the year ended December 31, 2006, as filed on February 28, 2007.

 

(10)   Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K dated December 11, 2007, as filed on December 14, 2007.

 

(11)   Incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the year ended December 31, 2007, as filed on March 3, 2008.

 

52


(12)   Incorporated by reference to exhibits to our Current Report on Form 8-K dated December 17, 2008, as filed on December 23, 2008.

 

(13)   Incorporated by reference to Appendix E to our Proxy Statement for the Annual Meeting of Stockholders, as filed on May 16, 2011.

 

(14)   Incorporated by reference to exhibits to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, as filed on August 12, 2011.

 

(15)   Incorporated by reference to Exhibit 10.17 to our Current Report on Form 8-K dated August 30, 2011, as filed on August 31, 2011.

 

(16)   Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated March 28, 2012, as filed on March 30, 2012.

 

(17)   Incorporated by reference to exhibits to our Current Report on Form 8-K dated February 27, 2013, as filed on March 5, 2013.

 

(18)   Incorporated by reference to Exhibit 3.4 to our Annual Report on Form 10-K for the year ended December 31, 2011, as filed on February 27, 2012.

 

53


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TELIK, INC.
/s/    Wendy Wee      

Wendy Wee

Vice President, Finance and Controller

(Principal Financial and Accounting Officer)

Dated: March 10, 2014

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael M. Wick, M.D., Ph.D. and Wendy Wee, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

Signature

  

Title

 

Date

/S/    MICHAEL M. WICK      

Michael M. Wick, M.D., Ph.D.

  

Chief Executive Officer and Director (Principal Executive Officer)

  March 10, 2014

/S/    WENDY WEE      

Wendy Wee

  

Vice President, Finance and Controller (Principal Financial and Accounting Officer)

  March 10, 2014

/S/    EDWARD W. CANTRALL      

Edward W. Cantrall, Ph.D.

  

Director

  March 10, 2014

/S/    STEVEN R. GOLDRING      

Steven R. Goldring, M.D.

  

Director

  March 10, 2014

/S/    RICHARD B. NEWMAN      

Richard B. Newman

  

Director

  March 10, 2014

 

54


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Telik, Inc.

We have audited the accompanying balance sheet of Telik, Inc. as of December 31, 2013, and the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor have we been engaged to perform, an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telik, Inc. as of December 31, 2013, and the results of its operations and its cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the Unites States.

The accompanying financial statements have been prepared assuming that Telik, Inc. will continue as a going concern. As discussed in Note 1 to the financial statements, Telik, Inc.’s recurring losses from operations, available cash and cash equivalents and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/    Burr Pilger Mayer, Inc.

San Jose, California

March 7, 2014

 

55


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Telik, Inc.

We have audited the accompanying balance sheet of Telik, Inc. as of December 31, 2012, and the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telik, Inc. as of December 31, 2012, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that Telik, Inc. will continue as a going concern. As discussed in Note 1 to the financial statements, Telik, Inc.’s recurring losses from operations, available cash, cash equivalents and investments and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/    Ernst & Young LLP

Redwood City, California

March 15, 2013

 

56


TELIK, INC.

BALANCE SHEETS

(In thousands, except share and per share data)

 

     December 31,  
     2013     2012  
Assets   

Current assets:

    

Cash and cash equivalents

   $ 2,229      $ 4,747   

Other receivables

     —          5   

Prepaids and other current assets

     381        626   
  

 

 

   

 

 

 

Total current assets

     2,610        5,378   

Restricted investments

     —          250   
  

 

 

   

 

 

 

Total assets

   $ 2,610      $ 5,628   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 20      $ 151   

Accrued clinical trial costs

     —          154   

Accrued compensation

     175        313   

Accrued liabilities

     169        481   

Accrued contingent lease termination fee

     591        —     

Short-term deferred rent

     —          4   

Current portion of facility exit costs

     —          1,022   
  

 

 

   

 

 

 

Total current liabilities

     955        2,125   

Noncurrent portion of facility exit costs

     —          441   

Commitments and contingencies (Note 6)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued or outstanding

     —          —     

Common stock, $0.01 par value: 100,000,000 shares authorized; shares issued and outstanding 4,583,096 in 2013 and 2,689,200 in 2012

     46        27   

Additional paid-in capital

     555,139        551,335   

Accumulated deficit

     (553,530     (548,300
  

 

 

   

 

 

 

Total stockholders’ equity

     1,655        3,062   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,610      $ 5,628   
  

 

 

   

 

 

 

See accompanying Notes to Financial Statements.

 

57


TELIK, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

 

     Years Ended December 31,  
     2013     2012     2011  

Operating costs and expenses:

      

Research and development

   $ 1,996      $ 3,524      $ 5,566   

General and administrative

     3,245        4,455        6,491   
  

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     5,241        7,979        12,057   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (5,241     (7,979     (12,057

Interest and other income, net

     11        8        35   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,230   $ (7,971   $ (12,022
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share*

   $ (1.17   $ (3.64   $ (6.69
  

 

 

   

 

 

   

 

 

 

Shares used to calculate basic and diluted net loss per share*

     4,480        2,188        1,798   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,230   $ (7,971   $ (12,022

Other comprehensive income, net of tax:

      

Changes in net unrealized gains on investments

     —          —          1   
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (5,230   $ (7,971   $ (12,021
  

 

 

   

 

 

   

 

 

 

 

*Adjusted   for the 1-for-30 reverse stock split as discussed in Notes 1 and 7

See accompanying Notes to Financial Statements.

 

58


TELIK, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

     Common Stock*      Additional
Paid-in
Capital*
     Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
     Shares      Amount            

Balance at December 31, 2010

     1,787       $ 18       $ 546,659       $ (1   $ (528,307   $ 18,369   

Comprehensive loss:

               

Net loss

     —           —           —           —          (12,022     (12,022

Change in unrealized gains (losses) on available-for-sale investments

     —           —           —           1        —          1   
               

 

 

 

Comprehensive loss

                  (12,021

Issuance of common stock under an At Market Issuance Sales Agreement, net of issuance cost

     16         —           149         —          —          149   

Share-based compensation expense

     —           —           1,558         —          —          1,558   

Common stock issued under stock option and purchase plans

     12         —           244         —          —          244   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     1,815       $ 18       $ 548,610       $ —        $ (540,329   $ 8,299   

Comprehensive loss:

               

Net loss

     —           —           —           —          (7,971     (7,971
               

 

 

 

Comprehensive loss

                  (7,971

Issuance of common stock under an At Market Issuance Sales Agreement, net of issuance cost

     873         9         2,026         —          —          2,035   

Share-based compensation expense

     —           —           696         —          —          696   

Common stock issued under stock option and purchase plans

     1         —           3         —          —          3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     2,689       $ 27       $ 551,335       $ —        $ (548,300   $ 3,062   

Comprehensive loss:

               

Net loss

     —           —           —           —          (5,230     (5,230
               

 

 

 

Comprehensive loss

                  (5,230

Issuance of common stock under an At Market Issuance Sales Agreement, net of issuance cost

     1,894         19         3,578         —          —          3,597   

Share-based compensation expense

     —           —           226         —          —          226
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     4,583       $ 46       $ 555,139       $ —        $ (553,530   $ 1,655   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

*   Adjusted for the 1-for-30 reverse stock split as discussed in Notes 1 and 7

See accompanying Notes to Financial Statements.

 

59


TELIK, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

 

     Years Ended December 31,  
     2013     2012     2011  

Cash flows from operating activities:

      

Net loss

   $ (5,230   $ (7,971   $ (12,022

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation

     —          1        10   

Gain on disposal of property and equipment

     (8     —          —     

Share-based compensation expense

     226        696        1,558   

Changes in assets and liabilities:

      

Other receivables

     5        20        189   

Prepaid expenses and other current assets

     245        60        54   

Accounts payable

     (131     42        (823

Accrued liabilities

     (608     (126     (288

Accrued facility exit costs and contingent lease termination fee

     (622     (1,463     (1,436
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (6,123     (8,741     (12,758
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of investments

     (2,510     (4,507     (11,720

Proceeds from sales of investments

     —          —          1,699   

Maturities of investments

     2,510        6,911        23,664   

Proceeds from sale of property and equipment

     8        —          —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by investing activities

     8        2,404        13,643   
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Net proceeds from issuance of common stock

     3,597        2,038        393   
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     3,597        2,038        393   
  

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (2,518     (4,299     1,278   

Cash and cash equivalents at beginning of period

     4,747        9,046        7,768   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 2,229      $ 4,747      $ 9,046   
  

 

 

   

 

 

   

 

 

 

Supplementary information:

      

Non-cash transaction disclosure:

      

Transfer of restricted investment in satisfaction of Porter Drive facility lease termination fee

   $ 250      $ —        $ —     

See accompanying Notes to Financial Statements.

 

60


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

1.     Nature of Operations and Going Concern

Business Overview

Telik, Inc. (“Telik,” “we” or, the “Company”) was incorporated in the state of Delaware in October 1988. We are engaged in the discovery and development of small molecule therapeutics. We operate in only one business segment.

We have incurred net losses since inception and we expect to incur substantial losses for the foreseeable future as we continue our research and development activities. To date, we have funded operations primarily through the sale of equity securities, non-equity payments from collaborators and interest income. The process of developing our products will require significant additional research and development, preclinical testing and clinical trials, as well as regulatory approval. We expect these activities, together with general and administrative expenses, to result in substantial operating losses for the foreseeable future. We will not receive product revenue unless we, or our collaborative partners, complete clinical trials, obtain regulatory approval and successfully commercialize one or more of our products.

Going Concern

We believe our existing cash resources will only be sufficient to fund our projected operating requirements through approximately May of 2014. Our ability to continue as a going concern is subject to significant uncertainty, including but not limited to, our ability to raise adequate capital to fund our current clinical development plan. We have incurred significant losses from operations and expect to continue to incur losses for the foreseeable future. While we were able to raise $3.6 million through the sale of our common stock in 2013, we cannot provide any assurances that we will be successful in obtaining additional funding, if at all. We have been and are currently seeking collaborative arrangements with corporate partners to fund the development and commercialization of TELINTRA, our lead product candidate. However, we cannot provide any assurances that we will be successful in closing a collaborative arrangement in a timely manner, if at all. As a result, we have retained a financial advisory firm to assist in these efforts and to explore and recommend strategic alternatives. These alternatives could include partnerships involving one or more of our product candidates, merger with or acquisition by another company, financings, the sale of company assets, in whole or in part, ceasing operations, or some other arrangement through which the value of our assets to stockholders could be optimized. We may have to further restructure our operations to conserve resources. These conditions raise a substantial doubt about our ability to continue as a going concern.

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Reverse Stock Split

On March 30, 2012, we effected a 1-for-30 reverse stock split of our outstanding common stock. The reverse stock split affected all stockholders of our common stock uniformly but did not materially affect any stockholder’s percentage of ownership interest. The par value of our common stock remains unchanged at $0.01 per share and the number of authorized shares of common stock remains the same after the reverse stock split. Unless otherwise noted, all impacted amounts included in the financial statements and notes thereto have been retroactively adjusted for the reverse stock split. See Note 7 for additional information.

 

61


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

Stock Offerings

In August 2011, we filed a shelf registration statement on Form S-3 to offer and sell, from time to time, equity securities in one or more offerings up to a total dollar amount of $25.0 million. On August 30, 2011, we entered into an At Market Issuance Sales Agreement, or the Sales Agreement with McNicoll, Lewis & Vlak LLC, or MLV, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $7.0 million from time to time through MLV as our sales agent. For the year ended December 31, 2013, we sold 1,893,896 shares of our common stock and received approximately $3.6 million in net proceeds under the Sales Agreement after deducting commissions and other related expenses. Since entering into the Sales Agreement, we have sold 2,782,887 shares of our common stock and received approximately $5.8 million in net proceeds.

Our ability to sell shares of our common stock pursuant to the Sales Agreement is subject to share volume limitations, market conditions and our continued listing on the Nasdaq Capital Market. There is no assurance that we may be able to raise any additional funds in the future under the Sales Agreement.

2.    Summary of Significant Accounting Policies

Use of Estimates

In preparing our financial statements to conform to U.S. generally accepted accounting principles, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results may differ from these estimates.

Cash and Cash Equivalents and Investments

We invest our excess cash in money market funds, cash deposits and U.S. government agency securities. All investments with stated maturities of three months or less from date of purchase are classified as cash equivalents. Debt securities with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Debt securities with remaining maturities greater than one year and which we intend to hold until maturity are classified as long-term investments. We classify all cash equivalents and investments as available-for-sale. Available-for-sale securities are carried at estimated fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss).

Realized gains or losses on the sale of investments are determined on a specific identification method, and such gains and losses are reflected as a component of interest income.

Marketable security investments are evaluated periodically for impairment. We take into account general market conditions, changes in economic environment as well as specific investment attributes, such as credit downgrade or illiquidity for each investment, the expected cash flows from the security, our intent to sell the security and whether or not we will be required to sell the security before the recovery of its amortized cost, to estimate the fair value of our investments and to determine whether impairment is other than temporary. If it is determined that a decline in fair value of any investment is other than temporary, then the unrealized loss related to credit risk would be included in interest and other income (expense), net.

Restricted Investments

Under certain operating lease agreements, we may be required from time to time to set aside cash as collateral. At December 31, 2012, we had approximately $250,000 of restricted investments related to a building lease agreement and there were no restricted investments at December 31, 2013.

 

62


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

Fair Value of Financial Instruments

We used the provisions of ASC 820, “Fair Value Measurements and Disclosure,” to determine the fair values of our financial and nonfinancial assets and liabilities where applicable. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. The objective of fair value measurement is to determine the price that would be received to sell the asset or paid to transfer the liability (an exit price) in an orderly transaction between market participants at the measurement date. The statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and that market participant assumptions include assumptions about risk and effect of a restriction on the sale or use of an asset. To increase consistency and comparability in fair value measurement and related disclosures, this statement establishes a fair value hierarchy that prioritize the inputs to valuation techniques used to measure fair value into three broad levels: (1) Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; (2) Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data; and (3) Level 3 inputs are unobservable inputs for asset or liability that reflect the reporting entity’s own assumptions about risk and the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Government agency securities are recorded at their estimated fair value. Since these government securities generally have market prices from multiple sources and it can be difficult to select the best individual price directly from the quoted prices in the active markets, therefore we use Level 2 inputs for the valuation of these securities. Using the Level 2 inputs, a “consensus price” or a weighted average price for each of these securities can be derived from a distribution-curve-based algorithm which includes market prices obtained from a variety of industrial standard data providers (e.g. Bloomberg), security master files from large financial institutions, and other third-party sources.

Exit and Disposal Activities

We record costs and liabilities associated with exit and disposal activities, as defined in ASC 420, “Exit or Disposal Cost Obligations”, at fair value in the period the liability is incurred. ASC 420 requires that the estimated future cash flows to be used in the fair value calculation be discounted using a credit-adjusted risk-free interest rate and that such interest rate shall have a maturity date that approximates the expected timing of future cash flows. Future cash flows related to lease obligations shall include the effect of sublease rental income and other lease operating expenses. In addition, accretion of the liability due to the passage of time is recorded as a general and administrative expense. See Note 5 for further information.

Research and Development

Our research and development expenses include salaries and benefits costs, fees for contractors, consultants and third party contract research organizations, and an allocation of facility and administrative costs. Research and development expenses consist of costs incurred for drug and product development, manufacturing, clinical activities, discovery research, screening and identification of product candidates, and preclinical studies. All such costs are charged to research and development expenses as incurred.

Clinical development costs are a significant component of research and development expenses. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the on-going development of our product candidates. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flows. We accrue and expense costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over

 

63


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

the life of the individual study in accordance to agreements established with contract research organizations and clinical trial sites. We determine our estimates through discussion with internal clinical personnel and outside service providers as to progress or stage of completion of trials or services and the agreed upon fee to be paid for such services. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the extent possible.

Stock-based Compensation

Under the provisions of ASC 718, employee stock-based compensation is estimated using the Black-Scholes option-pricing model and is recognized as expense ratably over the requisite service period in a manner similar to other forms of compensation paid to employees. The Black-Scholes option-pricing model requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of the award. For the years 2013, 2012 and 2011, the expected volatilities were based solely on historical volatility data as there were insufficient traded option activities resulting from our declining stock price. The expected term of options granted is based on the simplified method in accordance with SAB Topic 14.D.2, as our historical share option exercise experience does not provide a reasonable basis for estimation. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We adjust our forfeiture rate to reflect actual historical and expected cancellations of unvested options when applicable. See Note 7 to Financial Statements for additional information.

We have adopted the simplified method to calculate the beginning balance of the additional paid-in-capital, or APIC, pool of the excess tax benefit, and to determine the subsequent impact on the APIC pool and our Statements of Cash Flows of the tax effects of employee stock-based compensation awards that were outstanding upon our adoption of ASC 718.

Net Loss per Share

Basic and diluted net loss per share are computed by dividing net loss by the weighted average number of common shares outstanding during the year.

The following table reflects weighted average options outstanding before application of the treasury stock method that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been antidilutive for the periods presented herein.

 

     Years Ended December 31,  
     2013      2012      2011  

Weighted average outstanding options

     281,822         333,243         378,640   

Income Taxes

We apply the provisions of ASC 740, “Accounting for Income Taxes”. Under ASC 740, deferred tax liabilities or assets arise from differences between the tax basis of liabilities or assets and their basis for financial reporting, and are subject to tests of recoverability in the case of deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for deferred tax assets to the extent realization is not judged to be more likely than not.

 

64


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

ASC 740-10-25 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with ASC 740. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of Section 740-10-25 and in subsequent periods. Any potential accrued interest and penalties related to unrecognized tax benefits within operations would be recorded as income tax expense. To date, there have been no interest or penalties charged to us related to the underpayment of income taxes.

We adopted and applied ASC 740-10-25 to all income tax positions commencing from 2007. There was no impact on our financial statements upon adoption. Because of our historical significant net operating losses, we have not been subject to income tax since inception. At December 31, 2013, we have a liability for unrecognized tax benefits of $8.3 million, none of which, if recognized, would affect our effective tax rate. We maintain deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets include net operating loss carryforwards, research credits and capitalized research and development. The net deferred tax asset has been fully offset by a valuation allowance because of our history of losses.

Recent Accounting Pronouncements

We do not believe there are any recently issued, but not yet effective, accounting standards that would have a significant impact on our financial position or results of operations.

3.    Fair Value Measurements

We measure certain financial assets at fair value on a recurring basis, including cash equivalents and available-for-sale securities. The fair value of these financial assets was determined based on a three-tier fair value hierarchy as described in Note 2, which prioritizes the inputs used in measuring fair value.

The following table presents information about our financial assets that are measured at fair value on a recurring basis as of December 31, 2013 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

 

     Fair Value Measurement at December 31, 2013 Using  
     December 31,
2013
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 
     (in thousands)  

Available-for-sale securities (presented as cash equivalents) :

  

Money market funds

   $ 458       $ 458       $ —         $ —     

US government agencies

     1,400         —           1,400         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,858       $ 458       $ 1,400       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

65


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

The following table presents information about our financial assets that are measured at fair value on a recurring basis as of December 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

 

            Fair Value Measurement at December 31, 2012 Using  
     December 31,
2012
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 
     (in thousands)  

Available-for-sale securities (presented as cash equivalents) :

  

Money market funds

   $ 85       $ 85       $ —         $ —     

US government agencies

     3,575         —           3,575         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,660       $ 85       $ 3,575       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2 measurements in the years ended December 31, 2013 and 2012.

4.    Cash, Cash Equivalents, Investments and Restricted Investments

The following is a summary of estimated fair value of cash and cash equivalents, investments and restricted investments:

 

     December 31  
     2013      2012  
     (in thousands)  

Certificate of deposits

   $ —         $ 250   

US government agencies

     1,400         3,575   

Cash and money market funds

     829         1,172   
  

 

 

    

 

 

 

Total

   $ 2,229       $ 4,997   
  

 

 

    

 

 

 

Reported as:

     

Cash and cash equivalents

   $ 2,229       $ 4,747   

Restricted investments

     —           250   
  

 

 

    

 

 

 

Total

   $ 2,229       $ 4,997   
  

 

 

    

 

 

 

We had no material unrealized gains or losses for the years ended December 31, 2013 and 2012. There were no material realized gains on sales of available-for-sale investments for the years ended December 31, 2013 and 2012. Realized gains and losses were calculated based on the specific identification method.

 

66


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

The following is a summary of the cost and estimated fair value of marketable debt securities, held as available-for-sale at December 31, 2013 and 2012, classified by stated maturity date of the security:

 

     December 31, 2013      December 31, 2012  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Mature in less than one year

   $ —         $ —         $ 3,575       $ 3,575   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 3,575       $ 3,575   
  

 

 

    

 

 

    

 

 

    

 

 

 

5.    Facility Exit Costs and Accrued Contingent Lease Termination Fee

In November 2010, we ceased the use of our facility at 3165 Porter Drive in Palo Alto, California and subleased the facility to a tenant for the remaining contractual term of our master lease, which is through May 2014. As a result, we recorded a charge of $4.7 million which included the estimated fair value of future lease-related payments less estimated net income from sublease rental offset by a reduction of $335,000 in the balance of deferred rent related to the facility as of November 30, 2010.

On February 19, 2013, we entered into an agreement with our landlord, ARE San Francisco No.24, LLC, or ARE, pursuant to which the premises was voluntarily surrendered, the master lease and sublease were terminated as of February 28, 2013, we were relieved of further obligations under the master lease and further rights to rental income under the sublease, and we agreed to pay a termination fee to ARE of approximately $0.7 million. Prior to the termination of these agreements, the remaining lease payments to ARE through the end of the master lease totaled approximately $4.5 million and the remaining sublease income to Telik through the same period totaled approximately $3.2 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 otherwise be forgiven. As a result of the termination agreement, we reversed the remaining facility exit cost liability, recorded $591,000 as accrued contingent lease termination fee and included the net charge in general and administrative expenses in the Statements of Operations and Comprehensive Loss.

The following table summarizes the activities related to accrued facility exit costs for the year ended December 31, 2013 and 2012:

 

     December 31,  
     2013     2012  
     (in thousands)  

Beginning balance

   $ 1,463      $ 2,926   

Lease payments made during the period

     (603     (3,938

Sublease income received during the period

     418        2,448   

Termination fee paid or applied using deposit

     (714     —     

Amount transferred to contingent termination fee

     (566     —     

Non-cash accretion

     2        27   
  

 

 

   

 

 

 

Balance as of December 31

   $ —        $ 1,463   
  

 

 

   

 

 

 

Reported as current portion

   $ —        $ 1,022   

Reported as noncurrent portion

   $ —        $ 441   

 

67


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

6.     Commitments & Contingencies

Operating Leases

On February 27, 2013, we entered into a 21-month lease agreement for 3,075 square feet of office space at 2100 Geng Road in Palo Alto, California and relocated our corporate offices to this facility in March 2013. Upon execution of the agreement, we paid the sublessor the first month’s rent and we paid the second month’s rent on March 28, 2013, and deposited into an escrow account approximately $219,000 which represents the total rent due for the remaining term (May 1, 2013 thru November 30, 2014).

We have no future rental payments under our non-cancelable operating leases as of December 31, 2013 and none for the year 2014 and beyond. We recorded a $591,000 contingent lease termination fee, in connection with the termination of our master lease and sublease of our Porter Drive facility, which is payable to ARE if we receive $15 million or more in additional financing in the aggregate.

7.     Stockholders’ Equity

Reverse Stock Split

On March 30, 2012, we effected a 1-for-30 reverse stock split of our outstanding common stock resulting in a reduction of our total common stock issued and outstanding from approximately 54.5 million shares to approximately 1.8 million shares. As the par value per share of our common stock remained unchanged, a total of $527,000 was reclassified from common stock to additional paid-in capital. In connection with this reverse stock split, the number of common shares reserved for issuance under our ESPP and stock plans as well as the common shares underlying stock options were also reduced proportionately while the exercise prices of these stock options increased proportionately. All references to common shares and per share data for all periods presented in the accompanying financial statements and notes thereto have been adjusted to reflect the reverse stock split on a retroactive basis.

Stock Offerings

In August 2011, we filed a shelf registration statement on Form S-3 to offer and sell, from time to time, equity securities in one or more offerings up to a total dollar amount of $25.0 million. On August 30, 2011, we entered into the Sales Agreement with MLV pursuant to which we may issue and sell shares of our common stock having an aggregate offering price up to $7.0 million, from time to time, through MLV as our sales agent. In conjunction with the Sales Agreement, MLV would receive compensation based on an aggregate of 4% of the gross proceeds on the sale price per share of our common stock. Any sales made pursuant to the Sales Agreement are deemed an “at-the-market” offering and would be made pursuant to the shelf registration statement on Form S-3. For the years ended 2013, 2012, and 2011, we sold 1,893,896 shares, 872,854 shares and 16,137 shares of our common stock through MLV under the Sales Agreement and received net proceeds of approximately $3.6 million, $2.0 million and $149,000 respectively after deducting commissions and other related expenses. As of December 31, 2013, we have sold 2,782,887 shares of our common stock and received approximately $5.8 million in net proceeds.

Stockholder Rights Plan

In October 2001, our Board of Directors approved the adoption of a Stockholder Rights Plan, which provided for the distribution of one preferred share purchase right, or a Right, for each outstanding share of common stock of the Company. The dividend was paid on November 14, 2001 to the stockholders of record on that date. Each Right entitled the registered holder to purchase from the Company one one-hundredth of a share

 

68


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

of Series A Junior Participating Preferred Stock, par value $0.01 per share, or the Preferred Shares, at a price of $90.00 per one one-hundredth of a Preferred Share, or the Purchase Price, subject to adjustment. The Rights would be exercisable the earlier of (i) the date of a public announcement that a person, entity or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding common shares, or an Acquiring Person, or (ii) ten business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or entity became an Acquiring Person) following the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person or entity becoming an Acquiring Person. In May 2006, we amended the stockholder rights plan to exclude Eastbourne Capital Management, L.L.C., or Eastbourne, and certain related persons and entities from the definition of Acquiring Person so long as neither Eastbourne nor its affiliates or associates, either individually or in the aggregate, becomes the beneficial owner of 25% or more of the common stock then outstanding. On December 11, 2006, the plan was further amended to increase this threshold to 30%.

In the event that any person, entity or group of affiliated or associated persons became an Acquiring Person, each holder of a Right would have the right to receive, upon exercise, the number of common shares having a market value of two times the exercise price of the Right. In the event that the Company was acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power were sold to an Acquiring Person, its associates or affiliates or certain other persons in which such persons had an interest, each holder of a Right would have the right to receive, upon the exercise at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the exercise price of the Right. At any time after an Acquiring Person became an Acquiring Person and prior to the acquisition by such Acquiring Person of 50% or more of the outstanding common shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one common share, or one one-hundredth of a Preferred Share, per Right (or, at the election of the Company, the Company may issue cash, debt, stock or a combination thereof in exchange for the Rights), subject to adjustment. The Rights expired on November 14, 2011. Accordingly, we filed a certificate of elimination with the Secretary of State of the State of Delaware on February 24, 2012, or the Certificate of Elimination, which eliminated from our Amended and Restated Certificate of Incorporation all matters set forth in the Certificate of Designation with respect to the Preferred Shares. No Preferred Shares were issued or outstanding at the time of the filing of the Certificate of Elimination.

Stock Option Plans

In March 2011, we adopted the 2011 Equity Incentive Plan, or the 2011 Plan, and reserved 116,667 shares of Telik common stock for issuance under the 2011 Plan. Options granted under the 2011 Plan may be either incentive stock options (“ISOs”) or nonstatutory stock options (“NSOs”). The 2011 Plan also provides for the grant of stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards. For ISOs and NSOs, the option price shall be at least 100% and 85%, respectively, of the closing price of our common stock on the date of the grant. If, at any time we grant an option, and the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of Telik, the option price shall be at least 110% of the fair value and shall not be exercisable more than five years after the date of grant. Eligible participants include employees, directors and consultants of Telik. Options generally vest over a period of two or four years from the date of grant. Options granted under the 2011 Plan expire no later than 10 years from the date of grant. As of December 31, 2013, there were 68,295 option shares outstanding and 48,372 shares available for future grants under the 2011 Plan.

 

69


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

Prior to 2011, we had two options plans, the 2000 Equity Incentive Plan, or the 2000 Plan, and the 2000 Non-Employee Directors’ Stock Option Plan, or the Directors’ Plan, under which we granted stock options to employees, directors and consultants based on the provisions in each plan. These options generally vest over a period of two or four years from the date of grant. Options granted under these plans expire no later than 10 years from the date of grant. We have also granted performance-based options under the 2000 Plan which will only vest when our Board of Directors determines we have achieved the specific performance goals. The 2000 Plan and the Directors’ Plan expired in March 2010 and there were no new option shares granted under these plans thereafter. As of December 31, 2013, there were 187,186 option shares (including 28,334 shares of performance-based options) under the 2000 Plan and 5,795 option shares under the Directors’ Plan which were granted prior to the expiration of both plans and remained outstanding.

Employee Stock Purchase Plan

In March 2000, we adopted the 2000 Employee Stock Purchase Plan, or the Purchase Plan. We reserved a total of 8,333 shares of our common stock for issuance under the Purchase Plan. In addition, the Purchase Plan provides for annual increases in the number of shares available for issuance under the Purchase Plan beginning January 1, 2001. The number of additional shares to be reserved automatically will be equal to the lesser of 5,000 shares, 1% of the outstanding shares on the date of the annual increase or such amount as may be determined by the Board of Directors. The Purchase Plan permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock on the first day of the offering or 85% of the fair market value of our common stock on the purchase date. The weighted average per share fair value for stock purchase offerings under our Purchase Plan during 2012 and 2011 was $2.41 and $9.55 respectively. There were no participants enrolled in our new stock purchase offerings in 2013 under our Purchase Plan. As of December 31, 2013, there were 18,288 shares available for future issuance under the Purchase Plan.

Reserved Shares

At December 31, 2013, shares of common stock reserved for future issuance inclusive of outstanding option shares are as follows:

 

2011 Equity incentive plan

2000 Equity incentive plan

    

 

116,667

187,186

  

  

2000 Non-employee directors’ stock option plan

     5,795   

2000 Employee stock purchase plan

     18,288   
  

 

 

 
     327,936   
  

 

 

 

 

70


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

Stock Option Plan Activity Summary

A summary of activity under our stock option plans is as follows:

 

     Shares
Available

for  Grant
    Number of
Options
Outstanding
    Weighted
average
exercise
price per
share
     Weighted
average
remaining
contractual
term

(in years)
     Aggregate
intrinsic  value

(in thousands)
 

Balance, December 31, 2011

     35,553        363,072      $ 170.55         

2000 Plan options expired

     —          (53,427   $ 258.49         

2000 Directors’ Plan options expired

     —          (1,375   $ 299.09         

Granted

     (1,332     1,332      $ 4.80         

Canceled

     3,562        (3,562   $ 19.18         
  

 

 

   

 

 

         

Balance, December 31, 2012

     37,783        306,040      $ 155.66         

2000 Plan options expired

     —          (33,174   $ 208.75         

2000 Directors’ Plan options expired

     —          (1,001   $ 422.31         

Granted

     (999     999      $ 1.36         

Canceled

     11,588        (11,588   $ 20.70         
  

 

 

   

 

 

         

Outstanding at December 31, 2013

     48,372        261,276      $ 153.29         4.60       $ -0-   
  

 

 

   

 

 

         

Vested and expected to vest at December 31, 2013

       244,120      $ 161.57         4.53       $ -0-   
    

 

 

         

Exercisable at December 31, 2013

       231,028      $ 167.84         4.47       $ -0-   
    

 

 

         

The weighted average fair value of options granted during 2013, 2012 and 2011 was $1.15, $4.01 and $16.45 respectively. There were no options exercised during the year ended December 31, 2013 and 2012. The total intrinsic value of options exercised during the year ended December 31, 2011 was $29,000. The total fair value of shares vested during the years ended December 31, 2013, 2012 and 2011 was $251,000, $747,000 and $1.5 million respectively.

Stock-Based Compensation under ASC 718

Employee stock-based compensation expenses recognized in the years ended December 31, 2013, 2012 and 2011 were calculated based on awards ultimately expected to vest and have been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Total estimated stock-based compensation expense, related to all of our share-based payment awards, recognized under ASC 718 comprised of the following:

 

     Years Ended December 31,  
     2013      2012      2011  
     (in thousands)  

Research and development

   $ 92       $ 285       $ 715   

General and administrative

     134         411         843   
  

 

 

    

 

 

    

 

 

 

Stock-based compensation expense before taxes

     226         696         1,558   

Related income tax benefits

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Effect on net loss

   $ 226       $ 696       $ 1,558   
  

 

 

    

 

 

    

 

 

 

 

71


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

Because we had a net operating loss carryforward as of December 31, 2013, no tax benefits for the tax deductions related to stock-based compensation expense were recognized in our Statements of Operations and Comprehensive Loss. Additionally, no incremental tax benefits were recognized from stock options exercised in the years ended December 31, 2013, 2012 and 2011, which would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities. As of December 31, 2013, $7,000 of total unrecognized compensation costs, net of forfeitures, related to non-vested awards was expected to be recognized over a weighted average period of 1.83 year.

Valuation assumptions

Assumptions used in the Black-Scholes model were as follows:

 

     Stock Option Plans     Stock Purchase Plan  
     2013     2012     2011     2013      2012     2011  

Weighted average expected stock price volatility

     114.0     111.0     104.9     N/A         107.7     88.2

Weighted average risk-free interest rate

     1.08     1.29     2.14     N/A         0.21     0.26

Weighted average expected life (in years)

     6.08        6.08        5.53        N/A         1.18        1.25   

Weighted average expected dividend yield

     —          —          —          —           —          —     

8.    Income Taxes

We have incurred net losses since inception and, consequently, have not recorded any U.S. federal and state income taxes.

The provision for income taxes differs from the expected tax expense computed by applying the statutory federal income tax rate to loss before taxes as follows:

 

     Years Ended December 31,  
     2013     2012     2011  
     (in thousands)  

Tax at Federal statutory rate

   $ (1,778   $ (2,710   $ (4,088

State tax, net of federal income tax benefit

     (305     (465     (701

Research and development credit

     (129     (51     (51

Un-benefitted losses

     2,160        3,212        4,710   

Other individually immaterial items

     52        14        130   
  

 

 

   

 

 

   

 

 

 

Provision for income taxes

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

 

72


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows:

 

     December 31,  
     2013     2012  
     (in thousands)  

Deferred tax assets

    

Net operating loss carryforwards

   $ 21,261      $ 17,131   

Tax credits carryforwards

     4,696        4,424   

Capitalized research expenses

     —          1   

Stock based compensation

     4,551        5,048   

Other

     94        629   
  

 

 

   

 

 

 

Total deferred tax assets

     30,602        27,233   

Valuation allowance

     (30,602     (27,233
  

 

 

   

 

 

 

Net deferred tax assets

   $ —        $ —     
  

 

 

   

 

 

 

Realization of deferred tax assets is dependent upon the generation of future taxable income, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $3.4 million in 2013, decreased by $4.3 million at December 31, 2012 and decreased by $85.9 million in 2011.

As of December 31, 2013, we had U.S. federal and state net operating losses of approximately $45.3 million and $100.3 million, respectively. If not utilized, these carryforwards will begin to expire beginning in 2031 for both federal and state purposes. Approximately $10.6 million of the federal and $8.2 million of the state net operating loss carryforwards represents the stock option deduction arising from activity under the Company’s stock option plan, the benefit of which will increase additional paid in capital when realized.

We have research credit carryforwards of approximately $236,000 and $6.8 million for federal and state income tax purposes. If not utilized, the federal credit will expire at various dates beginning in 2030 through 2033. California state research and development credits can be carried forward indefinitely.

Effective January 1, 2007, we adopted ASC 740-10-25. This interpretation clarifies the criteria for recognizing income tax benefits under ASC 740, “Accounting for Income Taxes”, and requires additional disclosures about uncertain tax positions. Under ASC 740-10-25 the financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the twelve-month period ended December 31, 2013 is as follows:

 

     2013      2012  
     (in thousands)  

Balance at January 1

   $ 8,188       $ 8,145   

Additions for tax positions related to current year

     70         43   

Additions for tax positions of prior years

     62         —     
  

 

 

    

 

 

 

Balance at December 31

   $ 8,320       $ 8,188   

 

73


TELIK, INC.

NOTES TO FINANCIAL STATEMENTS

 

Interest and penalty costs related to unrecognized tax benefits are classified as a component of “Income Tax Expense” in the accompanying statement of operations and the corresponding liability in “Income Taxes Payable” or “Prepaid Income Taxes” in the accompanying balance sheet. We, however, did not recognize any interest expense related to unrecognized tax benefits for the year ended December 31, 2013.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to U.S. federal income tax examination for calendar tax years ending 2008 through 2013. Additionally, we are subject to various state income tax examinations for the 1990 through 2013 calendar tax years. The federal and U.S. state taxing authorities may choose to audit tax returns for tax years beyond the statute of limitation period due to significant tax attribute carryforwards from prior years, making adjustments only to carryforward attributes. The Company is not currently under audit in any major tax jurisdiction.

9.    Quarterly Financial Information (unaudited)

Selected quarterly financial information is summarized below (in thousands except per share amounts):

SELECTED QUARTERLY FINANCIAL INFORMATION

 

    2013     2012  

Quarter ended

  Dec. 31     Sep. 30     Jun. 30     Mar. 31     Dec. 31     Sep. 30     Jun. 30     Mar. 31  

Total revenues

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Operating costs and expenses:

               

Research and development

    302        380        528        786        736        867        932        989   

General and administrative

    484        742        859        1,160        1,032        1,011        1,123        1,289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    786        1,122        1,387        1,946        1,768        1,878        2,055        2,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (786     (1,122     (1,387     (1,946     (1,768     (1,878     (2,055     (2,278

Interest and other income (expense), net

    —          1        1        9        2        2        3        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (786   $ (1,121   $ (1,386   $ (1,937   $ (1,766   $ (1,876   $ (2,052   $ (2,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted (1)

  $ (0.17   $ (0.25   $ (0.30   $ (0.46   $ (0.66   $ (0.78   $ (1.11   $ (1.25

Weighted average shares used in computing net loss per share, basic and diluted

    4,583        4,572        4,560        4,199        2,687        2,395        1,849        1,816   

 

(1)   Net loss per share for each quarter are calculated as a discrete period; the sum of four quarters may not equal the calculated full year amount.

 

74


Exhibit Index

 

Exhibit
Number

  

Description

  3.1        

Amended and Restated Certificate of Incorporation. (2)

  3.2        

Certificate of Amendment to Amended and Restated Certificate of Incorporation (16)

  3.3        

Amended and Restated Bylaws. (10)

  3.4        

Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock. (5)

  3.5        

Registrant’s Certificate of Elimination with respect to Series A Junior Participating Preferred Stock. (18)

  4.1        

Specimen Common Stock Certificate. (1)

10.1        

Form of Indemnity Agreement. (1) (3)

10.2        

2011 Equity Incentive Plan and related documents. (3)(13)

10.3        

2000 Equity Incentive Plan and related documents. (3) (4)

10.4        

2000 Employee Stock Purchase Plan and Offering. (3) (4)

10.5        

2000 Non-Employee Directors’ Stock Option Plan and Agreement. (3) (11)

10.6        

Form of Non-Plan Stock Option Agreement. (3) (4)

10.7        

Telik, Inc. Executive Officer Bonus Plan. (3)(9)

10.8        

Amended and Restated Employment Agreement between Michael M. Wick, M.D., Ph.D. and Telik, dated December 17, 2008, as amended. (3) (12)

10.9        

Agreement for Termination of Lease and Voluntary Surrender of Premises dated February 19, 2013, by and between Telik and ARE-San Francisco No. 24, LLC. (6)

10.10      

Sublease between Telik and Boomerang.com, Inc. dated February 27, 2013 (17)

10.11      

Lease, between Telik and Aricent US, Inc., dated November 22, 2010. (14)

10.12*    

Manufacturing Supply Agreement dated July 1, 2004, by and between Telik and Organichem Corporation. (7)

10.13      

Telik, Inc. Change of Control Severance Benefit Plan, dated February 21, 2003, amended December 17, 2008. (3) (12)

10.14      

At Market Issuance Sales Agreement, dated August 30, 2011, by and between Telik, Inc., and McNicoll, Lewis & Vlak LLC. (15)

14.1        

Telik, Inc. Code of Conduct. (8)

23.1        

Consent of Independent Registered Public Accounting Firm.

23.2        

Consent of Independent Registered Public Accounting Firm.

24.1        

Power of Attorney (included on the signature pages hereto)

31.1        

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2        

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1        

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

101.INS   

XBRL Instance Document

101.SCH   

XBRL Taxonomy Extension Schema Document

101.CAL   

XBRL Taxonomy Extension Calculation Document

101.DEF   

XBRL Taxonomy Definition Linkbase Document

101.LAB   

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE   

XBRL Taxonomy Extension Presentation Link Document

 

*   Confidential treatment has been granted for portions of this document. The information omitted pursuant to such confidential treatment order has been filed separately with the Securities and Exchange Commission.

 

75


(1)   Incorporated by reference to exhibits to our Registration Statement on Form S-1, filed on April 3, 2000, as amended (File No. 333-33868).

 

(2)   Incorporated by reference to exhibits to our Annual Report on Form 10-K for the year ended December 31, 2001, as filed on March 27, 2002.

 

(3)   Management contract or compensatory arrangement.

 

(4)   Incorporated by reference to exhibits to our Registration Statement on Form S-8, as filed on August 30, 2000 (File No. 333-44826).

 

(5)   Incorporated by reference to exhibits to our Current Report on Form 8-K dated November 2, 2001, as filed on November 5, 2001.

 

(6)   Incorporated by reference to exhibits to our Current Report on Form 8-K dated February 19, 2013, as filed on February 22, 2013.

 

(7)   Incorporated by reference to exhibits to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, as filed on November 8, 2004.

 

(8)   Incorporated by reference to exhibits to our Annual Report on Form 10-K for the year ended December 31, 2003, as filed on March 5, 2004.

 

(9)   Incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for the year ended December 31, 2006, as filed on February 28, 2007.

 

(10)   Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K dated December 11, 2007, as filed on December 14, 2007.

 

(11)   Incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the year ended December 31, 2007, as filed on March 3, 2008.

 

(12)   Incorporated by reference to exhibits to our Current Report on Form 8-K dated December 17, 2008, as filed on December 23, 2008.

 

(13)   Incorporated by reference to Appendix E to our Proxy Statement for the Annual Meeting of Stockholders, as filed on May 16, 2011.

 

(14)   Incorporated by reference to exhibits to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, as filed on August 12, 2011.

 

(15)   Incorporated by reference to Exhibit 10.17 to our Current Report on Form 8-K dated August 30, 2011, as filed on August 31, 2011.

 

(16)   Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated March 28, 2012, as filed on March 30, 2012.

 

(17)   Incorporated by reference to exhibits to our Current Report on Form 8-K dated February 27, 2013, as filed on March 5, 2013.

 

(18)   Incorporated by reference to Exhibit 3.4 to our Annual Report on Form 10-K for the year ended December 31, 2011, as filed on February 27, 2012.

 

76